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in a s corp what is the difference from a salary and a dividend

withdrawal? How do you take...
in a s corp what is the difference from a salary and a dividend withdrawal? How do you take a dividend withdrawl is you are the head officer of a s corp?
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Answered in 18 minutes by:
11/17/2013
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,875
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Lane :

Hi

Lane :

In an S-corp, (just as with a sole proprietorship and a partnership) Dividends are taxed to owners whether you take them out or not ... If you've given yourself a salary (and do the payroll taxes on that that should be done along with the W-2 that should be provided) then that, along with all the other expenses are what comes out before the PROFIT that is taxed as a dividend (whether you pull t out of the company account or not)

Lane :

S-Corps are pass-throughs ... don't pay taxes them selves (just like the sole proprietorship and the partnership) and what should happen if, say, the owner is the only shareholder and the only employee ... is there should be BOTH a salary (which the owner uses to do his only taxes) and a k-1 for the dividend (profits) ALSO used to do tha taxes ... everything is taxed at the INDIVIDUAL level

Lane :

NO, the owner doesn't HAVE to pull out the CASH (which were the profits left at the end of the year) ... but will be taxed on them either way

Lane :

To answer the last part of you question ... in S-Corps, the way dividends are TAXED (and distributed IF you want to take them) is in proportion to ownership ... so if there are two 50% shareholders and the company has 100,000 left in profits at the end of the year (and remember wages are ust another expenes of the corporation, so maybe only one of the owner is involved day to day and takes a salary), each shareholder has $50,000 in taxable dividends ... and that one shareholder that has a salary, in this scenario, will have taxable wages on his/her W-2 as well

Lane :

Make sense"

Lane :

HI!

Customer:

undistributed income would be the profits left in the s corp. is this correct?

Lane :

One last thing ... I see you came into the chat, so I wait after this ... If you don't make a profit and there is cash in accounts that can be pulled out, THEN you are making a capital withdrawal (NOT taxable) but lowers your tax basis IN the S-Corp

Lane :

That's right it just sits that as an increase in you basis in the S-Corp ... THOSE dollars could be pulled leter WITHOUT taxation, because you had to pay tax on the profits either way

Lane :

But again, would lower your basis in the S-corp, by the amount pulled

Customer:

okay, someone had asked a question prior that he wanted to keep his ssi benefits intact and thus was forming a s corp, having people work for him, then taking dividends instead of a salary. how do you take a dividend/

Lane :

Again, with the S-Corp you GET a dividend anything there are profits (whether you TAKE that dividend or not)

Lane :

"any time" there are profits

Lane :

BUt that DOES work

Lane :

becuase for SSI purposes, DIVIDENDS are not EARNED income

Lane :

he'd just have to be sure that he wasn't doing any of the work, so that it's truly just an investment for him

Customer:

so in theory the s corp writes the owner a check and then files a k-1 at the end of the year for the dividend amount.

Lane :

That's right ... the k-1 HAS to be filed, by law, so it can be taxed (but it IS a dividend, not wages) ... then whether the check is AUTOMATICALLY written or is taken at the owners discretion is just a preference issue

Customer:

dividends are considered passive income?

Lane :

that's right

Customer:

a dividend taken later is considered a capital withdrawl or is that something else/

Lane :

OK... the owners always have a capital account ... and if there have been profits that have not been taken out then the capital account withdrawal is to GET TO those profits ... IF the company has never show a profit ... (OR if the owner has always pulled out the profits right after they're made) then a capital account withdrawal is pulling back original investment (basis)

Lane :

the capital account is the current ownership in the company ... equity

Lane :

profits land in there and losses reduce it

Lane :

physical withdrawals reduce it also

Lane :

sorry for the longs answer, but yes...a dividend taken later is considered a capital withdraw

Customer:

lets say the owner takes no salary, the company has a left over profit on $10,000, now the owner will get a k-1 at the end of year for the 10k because it passes through to his personal return. is this correct?

Lane :

you got it

Customer:

okay, the 10k is taxed at what rate? is it added to his earned income amount and becomes net income and taxed at regular adjusted personal tax brackets? or is it considered a capital gain and taxed at that bracket?

Lane :

Nope it's ordinary income ... just as a dividend would be if you owned IBM stock and it paid a dividend ... If you SOLD some of your stock (ownership) in your S-Corp THAT wold be a gain or loss (depending on what's in that capital account) ... it's only when you SELL something (like land, or a share of stock) and you get more out of it than you pit into it, that there's capital gain ... Dividends are ordinary income ... (just not EARNED ordinary income, it's passive ordinary income)

Customer:

so for ssi and food stamps and such, a person could be receiving benefits and getting large dividends from stocks or other company's. I guess since it is theoretically not a predictable stable form of income it is disregarded.

Lane :

Yes ... not really sure of the policy (reason it's not counted) I've always thought of it as ... DISABILITY is to replace what you can't EARN for yourself by working...... investment earnings have nothing to do with your ability to go to work and EARN wages or self employment income

Lane :

they are whatever they are

Lane :

investment earnings, I mean (That's why, with an S-corp you HAVE to be sure that it's truly passive income if you're the only (or one of the only) owners

Customer:

elderly people who work can only earn wages up to certain amount before there ss is cut. right?

Lane :

With a C-corp... that pays its OWN taxes (not a pass-through) ... at CORPORATE rates ... it MUCH cleaner that a non-employee shareholder's dividends are passive

Lane :

not before its cut, bet before some of becomes taxable (if you're talking aout social security RETIREMENT and not social security DISABILITY ... two different things)

Customer:

yes ss retirement

Lane :

yes on SS retirement, it's never cut (like ss disability can be), but over a certain level of income 1/2 of it becomes taxable and over an eve higher level 85% of it can become taxable

Customer:

okay

Lane :

I think we've covered a lot of ground ... have any questions at this point?

Customer:

no that's it for now, thanks

Lane :

You're very welcome, enjoyed it

Lane :

If you'd like to work with me again, you can either (1) add me as a preferred expert on your home page, (2) say “For Lane only,” at the beginning of another question OR (3) use my profile page: here http://www.justanswer.com/finance/expert-npvadvisor/

Lane :

And of course ...

Lane :

If this has helped, I would appreciate a feedback rating of 3 (OK) or better (excellent, is ideal)… That's the only I get credit for the work.


However, if you need more on this, please come back here, so you won't be charged for another question

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,875
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Verified
Lane and 87 other Tax Specialists are ready to help you
Ask your own question now

Thanks again, Frank

 

 

Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

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Let me know if I can help further..

 

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Thanks for the rating Frank.

If you'd like to ask for ME again just enter the questions here: Lane

Thanks again,
Lane

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Lane
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,875
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