S-Corp Profit Distributions: How Are Owners Taxed?

[Noureen A S.]

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]

@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.