Have a Tax Question? Ask a Tax Expert
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.
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.
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?
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.
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.