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J.Hazelbaker, Attorney
Category: Business Law
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I am a sole owner of an S corporation medical practice. Ive

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I am a sole owner of an S corporation medical practice. I've been open for 10 months, and I've been operating at a cumulative loss until last month. Up to this point, I have not been taking a salary, because I was not yet profitable. I've finally turned a profit in December, having made a little over $25,000 for the month, which is also my profit for the entire year as well.

Now that I'm profitable, I'm assuming that I will have to pay myself a salary. I just graduated from residency, where I was making $50,000 a year. I was considering giving myself a similar salary for the next year or so as a physician, until my practice becomes more financially stable, after which I would pay myself a higher salary. If that were the case, could I pay myself $4,200 ($50K divided by 12) for this profitable month, or will I need to pay payroll tax for the entire $25,000 profit for the month?

Also, my $25,000 income for 2011 will ultimately be fully deducted from my startup and equipment expenses. Should I pay income tax now and then collect a tax refund later, or could I just hold off on paying any tax with the expectation that everything will be fully deducted when I file my return?

Thank you.
Submitted: 5 years ago.
Category: Business Law
Expert:  J.Hazelbaker replied 5 years ago.
Hello. Thank you for using JustAnswer.

First, congratulations on your first of many profitable months!

Second, you have three options:

1) treat the profit as business income. You pay no salary and no payroll tax. All business income reported on 1040 Schedule C and is fully offset by year's credits and deductions.

2) you are an owner/member of the LLC. You can take an owner's draw of profit. You pay personal income tax, self-employment tax, but you are not treated as an employee and the company does not have the burden of dealing with administration of employee payroll (bwc, jfs, ui, taxes).

3) you treat yourself as an employee. The company takes on payroll responsibilities and issues a W-2 at end of January of each year. You pay income tax on the W-2 amount.

Many, if not most, opt for option 2.

Please let me know what follow-up questions you have. If my above responses have been helpful, please click Accept so that I get credit for the time/effort. You may always restart the thread and ask follow-up questions at any time by clicking the “Reply” button at the bottom of the question/answer thread. You can access this thread later in your profile under the “My Questions” tab.

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Customer: replied 5 years ago.
Thank you for your reply.

I'm not an LLC but a professional S corporation. I thought I had to pay myself a "reasonable" salary, and as a corporation, i thought I was an employee whether I want to or not. If I just draw the profit as a distribution, wouldn't I be subject to an audit since I would be bypassing the payroll tax of my "reasonable" salary?

Could I still treat my profit as business income as an S corporation and opt for option #1?

Another thing I was considering to do is to just take back this years profit as a loan repayment from my startup costs, and file a 1099 for the interest only. That way, the corporation wouldn't have any income for the year.

What do you think.

Thank you for the reply.

Expert:  J.Hazelbaker replied 5 years ago.
Last question first, as I think that is the better of all the options to handle your original question. This accomplishes a couple goals: it pays you back (getting you cash) for the start-up loan, while also giving the company a full write-off.

Yes. Under an S Corp, you must pay yourself a "reasonable salary", but that comes into play more when there are multiple shareholders.

If you are the sole shareholder, you can take a distribution for the end of year profit realized in December without considering yourself an employee.

However, when you make consistent monthly profit this year, the employee is the right way to go. When there is no consistency and you are dealing with an occassional windfall, the distribution is the best way to get the money out of the corp.

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