S-Corp Profit Distributions: How Are Owners Taxed?

Question

Dilemma...

I have an S-corp. For the majority of 2017, I paid myself outside of payroll ($5K was paid to me thru payroll and $20K were just 'owner withdrawals' - my acc'tant said they must be recorded as "profit distributions").

So, for 2017, I've been left with the following #s:

- S-Corp profit: $10K

- (personal) W2: $5K

- (personal) profit distribution ("earnings"?): $20K

Exactly what will I be paying income taxes on? (I have 100% ownership)

- $35K? (S-Corp flow-thru + W2 + profit distribution)

- or $15K and I pay a different kind of tax rate on the $20K of profit distributions?

Thanks in advance, guys!

Nicholas Aiola · Answer

@Noureen A S. S Corps are pass-through entites. S Corp profit = profit distribution, in terms of taxes (maybe not in terms of cash flow). As the sole owner, all income will be reported on your personal return via the W-2 and K-1 received from the S Corp. If your S Corp profit was $30k after payroll and your wages were $5k, you will be paying income tax at your ordinary rates on $35k (even if you only took $20k of distributions out of the S Corp).

The difference between wages and profit is self-employment tax. Your wages were subject to employment taxes (FICA withheld from your paychecks and remitted by the "employer" + the employer's share of the payroll expenses); however, the excess profit is not and, therefore, escapes SE tax.

Cliff T. · Answer

Thanks @Nicholas Aiola. Is Box 1 typically included in someone's personal DTI calculation? The ordinary income (Box 1) flows to my personal tax return and I'm paying taxes on it, as you mentioned. However, the lender is saying that income can't be counted towards my DTI since it's the business's income and Not my own. Seems odd to me as I can prove the business has the liquidity and funds to disburse to me at any time.

Nicholas Aiola · Answer

@Cliff T. Your Box 1 profits are taxable regardless of the distributions. Box 12 is other deductions; Box 16 includes distributions - this does not affect your taxable income.

Cliff T. · Answer

@Nicholas Aiola Can you clarify... for your S-Corp's K1, do you retain your profit as ordinary income (Box 1) or distribute everything to yourself (I believe Box 12)? I'm running into a situation where a lender is saying that can only count Box 12, even though I own the S-Corp 100% and any ordinary income is mine.

Noureen A S. · Answer

Yep - that's correct: I already paid taxes on the $5K since it was paid thru payroll... I forgot.

Okay - I have a better understanding now.

Thank you!

Wayne Brooks · Answer

I would assume you already paid taxes and ss/med on the $5k W-2, otherwise it wouldn’t be “W-2”. Assuming so, that leaves $30k taxable, on top of the $5k.

S-Corp Profit Distributions: How Are Owners Taxed?

S-Corp Profit Distributions: How Are Owners Taxed?

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