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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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Hi, I incorporated as an S corp in 2011 suposedly to protect

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Hi, I incorporated as an S corp in 2011 suposedly to protect and tax shield all the big gains I was going to make trading forex, so whoever answers this question needs to be familar with someone that is day trading curriecies. Finally it looks like I may finally have learned how to do this.I have f approximately l22000 dollars, it was litarally matress money, hidden under the bed my wife saved out of her house allowance over the last 10 years. 18000 of it is in the corporate bank account , 3500 is in the forex account to trade. Lets say that I average a gain of 2000 dollars a month for all of 2013. What are my taxes? What if I want to take 1000 dollars a month as a salary or a distribution? what about payroll taxes basically ineed to know everything that impacts my tax, and how to minimize my burden, but not run an audit risk, and I really dont know anything about my situation Ps S corp based in Wyoming, Personal resdence for state tax, NC Thanks
Thanks for your tax question today.

Since you have set up and S-Corporation, all of your income will flow to your personal return. If you are an active trader and elected to be treated as a trader, there are several issues you need to be aware of. In order to be a trader, you must be regularly and actively participating in trading, not just a few trades a day, but spending a few hours a day at the minimum. I will not go into a full discussion of whether or not you are a trader in this question.

You may have also elected to have your trades using the Mark-to-Market method. Being that you are unfamiliar with most of the basic S-Corp issues, I will assume you did not make such an election.

Any wage you pay yourself from the entity as an "employee" is subject to employment taxes (SE Taxes), such as Medicare and Social Security. For 2013, this amount is 7.65% paid as a deduction from your wage and an equal match from the corporation side. You must pay these taxes to the IRS no less often than monthly, and reports are due quarterly.

Since it is assumed all of your trades are short term in nature, there is no special tax treatment for these transactions. Normally, a non-trade would classify this income as capital gains and not ordinary income. This would flow to your personal tax return on Schedule D, and is not subject to SE tax.

Your S Corp would also have no ordinary income, just capital gains, so there would be no money to pay a salary or a need in this case.

If you are an active trader, you could then treat all the income as ordinary in nature, and therefore pay yourself wages, and deduct ordinary expenses against the income. The income or loss would then pass to your 1040 as ordinary income instead of capital gain income.

I cannot determine your tax burden or whether it is better to take how much in salary versus how much in profit distributions because the calculations are not only complex, but require knowledge of all your other income on your 1040, your personal situation, etc.

This is best done by spending some time with a tax adviser or CPA that you can hire and can represent you. It is not something that can be calculated on the back of a napkin because there are many decisions you need to make about how to handle certain issues.
Customer: replied 4 years ago.

Thanks. I understand some of what you are saying. based on what I have, and what im doing. I would say that i dont meet qualification for status asa full time trader right now, but i may attain that in the future. still i actually dont know enough right now to say whether that staus is advantageous to me. Mark to market is entirely new to me so I havent made any such election. Im a nurse, usually work as a travel nurse, so That would be other income source for 2013 if i dont make a great deal a t trading. So based on that I think that all my profit could be considered capital gains. My trades of which there would be 9-20 per week, only last a few minutes at a time. So given that am correct in assuming that no payroll tax is owed on that, Is it just what ever the tax on capital gains is for a corporation in 2013? Ive never had capital gains of any substance before to deal with. If I dont pay myself a salary how do I use the gains to live on? Can I just take what ever i need and leave the rest to accumulate in the trading account to build it up? Do I have to follow some sort of schedule? Are the electronic transfer records sufficient to satisfy tax filing requirements

You can take any money out of the accounts and spend it as you like, whether it is original principal or gains.

You will not receive a tax statement at year end, like a 1099, because they are not issued for currency transactions. You will need to keep track of gains and losses. SInce everything is short-term, your gains and losses will be netted and passed from he corporation's 1120-S to your 1040 on Form K-1.

You will pay tax on the gains as ordinary income, not subject to SE tax. In the current setup, I'm not certain why you are using an S-Corp as it seems to have no tax savings or legal protection based on your activity.

Be absolutely sure you keep your trading records. Otherwise, the IRS being the unintelligent group it is, sees money being deposited and assumes it is 100% income and ignores all costs and basis. They think like a gorilla. It is up to the taxpayer to prove them wrong in an audit.

Remember that in your current status, losses in excess of $3000 beyond your gains will not be deductible in the current year and flow to the following year.

Good luck in your trading activities.
R. Klein, EA and other Tax Specialists are ready to help you
Customer: replied 4 years ago.

ok thanks. I probably got over sold on the S corp. part of my self paid education. One more clarification. Is the profit double taxed? once at he cooperate level, and once as my in come on my personal account, or just once in this process with the set up I have? Im thinking that it is based on what you say, and Id be beter served to move the funds to personal account and just be taxed once thanks

S Corporations do not pay tax. It is a pass-through entity. That means if the corporation has a $1 profit, the profit is passed to you individually to pay tax on it.
Customer: replied 4 years ago.

Thanks let me know if i need to do anything else so you get paid

Once you provided a positive rating, I am credited with assisting you. Have a good day!