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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
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Experience:  Over 20 Years experience
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I currently have a C Corp, for which I am finally filing my

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I currently have a C Corp, for which I am finally filing my '1120' for 2010 and 2011. For tax year 2010 I did no payroll, but have compensation for officer (myself) on line 12. For tax year 2011 I did some payroll (very little) and also have compensation for officer on line.

I'm not sure how to proceed so that I can file my personal taxes

Randalltax :

Hi. I will try to help you.

Randalltax :

First, how did you manage to have compensation to the officer, but no payroll? That is not possible if done correctly.

Randalltax :

An officer in a C Corp can only have compensation through the payroll and therefore receive a W-2.

Randalltax :

The only other way to take money out of a C Corp is through a dividend. However, the dividend is NOT a deduction when computing the corporation's taxes.

Customer:

Well, the compensation would be the net after expenses

Randalltax :

Then it is not a deduction if it is net. You don't get to take any compensation deduction.

Randalltax :

Your C corporation pays taxes on its net income (not including dividend distributions). If you distributed a dividend, then it would flow to your 1040 on Schedule B as a qualified dividend.

Randalltax :

Dividends are paid out of Retained Earnings of the corporation. If the dividend exceeded R/E, you have a capital gain as well on the personal side.

Randalltax :

Dividends are paid from the corporation After Tax.

Customer:

Oh ok.. Not really sure which direction to go then

Randalltax :

You go the way the money went. You pay tax on the corporation, then you pay tax on the dividends from your 1040 assuming it did not exceed Retained Earnings of the corporation.

Customer:

So instead of line 12, I should record my compensation as dividends from the C Corp? and then file aXXXXX

Randalltax :

That is the only way to go at this point. Your corporation will have a higher tax.

Randalltax :

How much did you take out of the company, round numbers?

Customer:

I'm not recognizing on the 1120 where I should put the amount to be distributed as dividends

Randalltax :

Schedule M-2

Customer:

I guess I will have to go back and make changes with my turbo tax software.

Randalltax :

OK. We'll be here if you need further assistance.

Customer:

Once I generate the M-2, then I use that for form 1040?

Randalltax :

There are no forms that flow directly from an 1120 to 1040.

Randalltax :

It is not like an S-Corporation.

Customer:

So then how do I properly file my personal taxes without creating a w-2?

Randalltax :

The dividend goes on Schedule B.

Randalltax :

You didn't do payroll, so you can't get a W-2

Randalltax :

You have no earned income.

Customer:

or would it be better to create a w-2 and owe taxes..

Customer:

well I did some payroll for 2011

Randalltax :

If you do a W-2. you will have to go back and file payroll reports 940 and 941 to match. The IRS matches 941 against W-2

Randalltax :

And then, since you did not deposit taxes, you will have a crazy penalty. It starts at 10% for being 15 days late and gets bigger.

Randalltax :

Your tax penalties will exceed any tax savings.

Randalltax :

You can stop this form happning in the future by putting yourself on payroll now.

Customer:

when you say "sch b" is that "1040 sch b"

Randalltax :

Your accountant should have told you that you cannot pull lumps sums of money out of a corporation.

Randalltax :

Schedule B for dividends is attached to the 1040.

Customer:

which form do I use to show that the C Corp is showing disbursement of dividends?

Randalltax :

Schedule M-2

Customer:

I think I got it

Randalltax :

OK.

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