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Jonathan Tierney
Jonathan Tierney, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 322
Experience:  Tax Accountant at Praxair, Inc.
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I understand your answer. I guess my problem is that because

Customer Question

I understand your answer. I guess my problem is that because I didn't fully understand the Distribution versus W2 wages, I caused myself a little bit of a problem that does not sound easy to get around. I have my accounting firm that deals with this, but I needed a quick answer to ease my mind. I just bought out all of the Stockholders at the beginning of the year and before that, never did distributions much because it had to be made to ALL stockholders proportionately. This year, I felt it would be better to utilize more distribution since it does not come off of the company's profit and less wages as W2 wages. Since most of our business picked up in the last half of the year, I only decided this in the last couple of weeks and up to this point, was accruing wages to be paid if the Company could afford them. Now I can utilize the distribution and back out those accrued wages, thereby showing more profit. I know it is 6 of one, half a dozen of another, but it looks as though the penalty is hard to avoid. We could argue that the profits really didn't show until the last half of the year, not allowing the 4 equal estimates, but.......If I pay a bonus, it reduces profits, but it may be better than paying a penalty?
Submitted: 2 years ago.
Category: Tax
Expert:  Jonathan Tierney replied 2 years ago.

An S corporation is required to pay its employee-shareholders "reasonable compensation" for their services so I would not back out all of your salary. You do not necessarily have to pay more in wages, but rather increase your withholding on your salary that you do pay so you get credit retroactively to the beginning of the year.

The estimated tax penalty is currently about 3-3.5% and the combined FICA and Social Security taxes are 15.3% (half paid by the corporation and deductible by the corporation and the other withheld on your wages) up to $118,500 in earned income. Once you are over that threshold, you only have a 2.9% Medicare tax that is also split in half between the employer and employee. Based upon these rates, it might make sense to just pay the penalty, however, however if you report less earned income you will qualify for less Social Security, though Social Security is not really a sound investment.

The ultimate choice is up to you and what you think is best for yourself.