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jgordosea
jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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My business is a single-stockholder/single officer (me) S-Corp

Customer Question

My business is a single-stockholder/single officer (me) S-Corp in its first year of existence, in Georgia. I do my own accounting/bookkeeping/payroll. As a pass-through entity, remaining profit at year-end gets passed to me in form of dividends. How do I categorize it on my own 1040, and is it normal to have a disproportionately large 4th quarter Estimated Tax deposit as this remaining profit is determined and distributed year-end? How do I leave some money in the operating account for a smooth continuum into 2010 in a pass-through S-Corp?
Submitted: 3 years ago.
Category: Tax
Expert:  jgordosea replied 3 years ago.

Greetings,

 

Technically, what you have termed dividends are actually distributions of capital (that is, return of your investment). These distributions are not reported as dividends by either the corporation or by you, the shareholder.

 

Form 1120 S (Schedule K-1) will be prepared as part of the corporate return and will include the amounts and types of income for the year to be reported by the shareholder.

 

Whether or not the cash is distributed to you, the net profit of the S Corp will be reflected on the K-1 from the corporation, entered on your 2010 Form 1040 (Schedule E) Page 2 and will flow to your Form 1040 line 17 to be combined with your other income.

 

So, you can choose to leave as much or as little cash as you deem proper for operating capital without any affect on your individual income tax return.

 

Most shareholders of sole owner corporations do not make a disproportionate fourth quarter estimated payment; but rather pay in quarterly on the projected annual earnings of the corporation (plus your other individual income).

 

Please ask if you need clarification.

Best wishes.

 

 

 

 

 

 

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3014
Experience: I've prepared all types of taxes since 1987.
jgordosea and other Tax Specialists are ready to help you
Customer: replied 3 years ago.

Mr. Gordos,

 

Thank you for your prompt and informative reply. I continue to have trouble with classifying the net profit of my single-shareholder S-Corp for purposes of making my last quarterly Estimate deposit for taxes. The S-corp began April 5, 2010. I did not forecast well the amount my S-Corp would have as net profit at year-end and accomodate for it along the way with my rather low first three Quarterly Estimates; now I know the amount.

  • I use TurboTax2009 to help me calculate my tax expectation for 2010 under its Estimates function, and calculate my quarterly estimate deposits based on that. I am able to enter my 2010 wages and withholding without confusion. When it comes to the net profit at year end, I'm still confused where to put that number to run the calculations. It has several categories under "Enter Investment Gains or Losses":
  • Qualified Dividends,
  • Short Term Capital Gains or Losses,
  • 28% Capital Gains or Losses,
  • Long Term Capital Gains or Losses,
  • Section 1250 Unrecaptured Gains or Losses, or
  • Investment Income Election.

There is also a "catch-all" category called

  • "Other Investment Income".

I noticed that the tax rate is calculated differently depending on the category, so I want to choose correctly. I had assumed my Net Profit for my S-Corp would be entered under Qualified Dividends, but your answer stated "not reported as dividends by..." Please clarify.

Thanks,

Charles

Expert:  jgordosea replied 3 years ago.

Hello again,

 

When using an estimator, so long as the net profit from your S corporation is added to your total income as ordinary income (and not subject to any additional tax other than income tax) the result will be correct.

 

Qualified dividends and capital gain income (and perhaps even other investment income) have special tax rates and are not taxed at your marginal tax rate for ordinary income. That is, qualified dividends are taxed in 2010 at 15% rate regardless of the amount of your income.

 

For example. at http://turbotax.intuit.com/tax-tools/calculators/taxcaster/ your S corporation net profit could be entered as miscellaneous income but could not be entered as dividend income or gain/losses. The tax rate on ordinary income is progressive and increases (10%, 15%, 25%, etc.) as total income increases. The tax rate on qualified dividends is always just 15%.

 

You could even add the net profit to your wages and get a correct total of income that will be taxed at the proper rate since wages are ordinary income and not subject to additional taxes.

 

You do not want to list your net profit as business income as that type of income is subject to self-employment tax and your S corporation income is not (unless you have decided it will be treated as if it is, due to not paying yourself a wage).

 

Some calculators will have a category, or line entry, for income from S corporations (and rentals, etc. on Schedule E). For example see the 1040 Tax calculator at Taxes & Payroll

 

I hope this helps clarify that you want to choose any income category that will have progressive rates and not be subject to self employment tax when entering the S corporation net profit in a tax estimator.

 

 

 

 

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