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MequonCPA
MequonCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2324
Experience:  CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
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S-Corp has net income for 2008 of $40,000. I gather it is

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S-Corp has net income for 2008 of $40,000. I gather it is required that all of this income is taxable in 2008, as it is passed through to the shareholder (just 1) on the K-1.   The S-Corp has 2 employees (one of which is the 100% shareholder). S-corp is paying the 2 employees a "fair" salarly. The S-corp itself has not had any income since July 2008 and the outlook for 2009 is not good either. Does it make sense for the S-corp to continue to pay the salaries (and other expenses)? Since all income from 2008 was distributed the S-corp can't pay the upcoming 2009 bills.
Submitted: 5 years ago.
Category: Tax
Expert:  MequonCPA replied 5 years ago.

Dear mjlecompte -

 

You are correct that all of the income is taxable in 2008. While all of the income is taxable, you would have only needed to distribute enough to cover the tax on the income.

 

You should certainly defer paying yourself. Even if the S Corp has a loss, you may be able to take the loss on your personal return depending on the basis of your stock.

Customer: replied 5 years ago.
The main point I'm trying to get clarified in my head is that I paid taxes on the $40k (on my personal taxes). I realize I have the option to whether I physically distrbute that money to myself or not...but I still pay the taxes on it. So, let's say I leave that money in the company bank account. Then come 2009, I pay my "fair salarly", I'll be paying taxes AGAIN on that same money. When I put that $40k back into the company, I increase my basis in the company by $40k? If it helps, my business is providing engineering consultation (service business), there's no inventory or assets to speak of. The botXXXXX XXXXXne answer for me I think is that I'm trying to see how I am not taxing myself twice! At the moment using what I've described I feel that I'm being (unfairly?) taxed twice on the same money.
Expert:  MequonCPA replied 5 years ago.

DearCustomer-

 

You won't be taxed twice. Let's assume that at the end of 2008 there is cash and equity of $20,000. In 2009 you have no income and pay yourself a salary of $10,000 (payroll taxes ignored).

 

You will have W-2 income of $10,000, and you will have an S-Corp K-1 loss of $10,000. On your personal return you end up at $-0- net income. At the end of 2009 the corp has $10,000 cash and $10,000 equity.

MequonCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2324
Experience: CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
MequonCPA and 3 other Tax Specialists are ready to help you
Customer: replied 5 years ago.

I am taxed twice! Aren't I? You said payroll taxes ignored. But that's my point. At the end of 2008 there is $20k. By all rights I should disburse that net income to the shareholders and it is passed thru and shows up on the personal 1040. I pay 2008 personal taxes on the K-1 net income. Ok...so I have PAID the taxes on that $20k. Now...onto 2009....I "have to pay myself a salary" so I put that $20k back into the company (increasing my basis I guess) and pay my salary, which I pay payroll taxes on. So I got taxed again, yes? By all rights, I should lay myself off and collect unemployment (which also boggles my mind in a one may company how I can collect unemployment in a one man company and still have someone "manning the phones" while the entire company has been laid off). Something doesn't seem fair here. Is it because I'm an S-corp...if I were sole proprietor or something would I have to pay myself a salary and retax myself on my own reinvested money?

Expert:  MequonCPA replied 5 years ago.

DearCustomer-

 

What I meant by payroll taxes ignored is that I didn't factor in the employer's portion of social security and medicare.

 

Your example ignores the fact that if you do pay a salary in 2009, the S corporation gets a deduction for the salary. Assuming no revenue and only the salary, you would receive a K-1 with a loss equal to the salary paid (payroll taxes excluded). Your individual return would net a zero because the two items offset each other.

 

I'm not sure of the rules in Florida, but in Wisconsin, there is a limitation as to how much unemployment a corporate shareholder/employee can receive.

 

Customer: replied 5 years ago.
Thanks Steve. I think I follow along with what you are saying. Maybe I'm being hard headed here, but still seems to me that I'm paying myself a salary. My company pays the employer side of payroll taxes. I pay the employee side of the payroll taxes. The company will declare those payroll taxes as expenses (as well as the salary itself). Any way you skin it, I am paying taxes on the salary I get in 2009 even though my company is or has not made any income. I'm putting money back into the business just to pay myself a fair salary (as required by IRS). Sounds like I have to close the business up just so I don't keep putting money into the business so I can just pay taxes on the money I put into it (yes, the personal taxes may net to zero...possibly....but I'm paying payroll taxes just for the fun of it?).
Expert:  MequonCPA replied 5 years ago.

DearCustomer-

 

My apologies. Now I understand what you're talking about. I was only considering income taxes.

 

You are correct. You will be out of pocket the payroll taxes. My example of zero income was only to show the net income tax effect of the salary.

 

If your business revenue has decreased dramatically and you have other deductions that will more than offset the income, you should defer any salary.

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