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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29954
Experience:  Taxes, Immigration, Labor Relations
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Let's say I were to set-up an S Corp now Business

Customer Question

Hello, Let's say I were to set-up an S Corp now for a Business Consultant Firm that I'm interested launching sometime next year. In the meantime I will pay myself with start-up capital from my business account. I expect not to pay taxes for earnings since there is no income coming in from the business due to it being inactive. But what about the income I am paying myself with from my business account? Do I have to pay taxes on that?
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.
The issue is that when S-corporation is elected as eh tax structure - there is a special treatment - while S-corporation files its own income tax return - it doesn't pay income tax - instead all taxable income is passed to shareholders - who will include that taxable income in their individual tax returns - and that is regardless if that income is distributed or not.So when you are using S-corporation as a legal structure for your business activities - your taxable income will be from two types. - wages that S-corporation pays to you - and that woudl be deducted by S-corporation on its income tax return - form 1120S. - income that calculated on 1120S and passed to you as a shareholder on K1.When there is actual distribution from S-corporation to you as a shareholder - that distribution is not taxable - but will reduce your basis in S-corporation shares. When the basis is reduced to zero - any additional distribution is taxed as capital gain.
Customer: replied 2 years ago.
Understood, thanks.
Expert:  Lev replied 2 years ago.
After election is - S-corporation would be a separate taxing entity and you will be an employee of that S-corporation. So S-corporation files its own income tax return (form 1120S) and employment tax return (for wages paid to employees).You as an employee will be issued W2 form that is reported on your individual tax return (form 1040)However - while S-corporation is a separate legal and taxing entity - it pays NO income tax. Instead all taxable income is passed to shareholders.In your situation - you woudl be both - an employee and a shareholder of S-corporation.As an employee - you will receive wages reported on W2.Wages are deducted on S-corporation tax return (1120S) as business expense - and remaining income realized by S-corporation is passed to you as a shareholder - and reported on K1 statement.Compare with self-employment income from disregarded entity (single member LLC) when all income is subject to self-employment tax... 15.3%with S-corporation wages are subject to employment tax that are essentially same,but income passed on K1 is NOT subject to either self-employment tax nor employment tax - and here is a potential saving.