Taking distributions from my S-Corp

[Alex2022]

Just started an S-Corp this year and had a question regarding taking distributions from it:

I run payroll for myself with gusto every month, around 70% of my S-Corp income is paid as salary to myself. There are business expenses that I pay for such as licensing/solo 401k contributions/office expenses that I pay out of my business bank account. There is about 20% of my S-Corp income that is left in my business account and I was wondering how I can take that as a distribution and pay the necessary taxes on it? One option recommended was to just increase my tax withholdings on my salary in payroll, is that a viable option?

Thank you for your responses in advance.

[jacoavlu]

last I knew Gusto did not have a mechanism by which to pay S corp distributions. You would simply write a check from your business account to yourself. And record it properly in your bookkeeping

I’m sure you’re working with a qualified accountant?

[Alex2022]

Yes that's the plan, write a check from my business account to myself.
The question is what's the best plan in terms of paying taxes on that money?
I do my own payroll and my accountant does taxes for me at the end of the year, so I was wondering how people usually pay the taxes on that throughout the year.

[White.Beard.Doc]

Sorry for the long post, but I have a lot of experience with this issue over the years….

I am a physician entrepreneur and have started and owned S corps. I currently take S corp distributions quarterly and pay estimated taxes at that time, but how I pay the taxes on S corp distributions has evolved over time.

The estimated tax payments are due quarterly, on Jan 15, April 15, June 15, and Sept 15. The estimated tax payment deadline is either 15 days before, or 15 days after the end of each quarter of the year, depending on the quarter.

In the days when my S corp distributions were smaller than my W2 income, I just increased my W2 withholding. The beauty of paying taxes through W2 withholding is the government counts the W2 withholding tax payments as paid equally throughout the year, even if you pay all of it on the last paycheck of the year. This method can help avoid late payment penalties. There were times in the past where I withheld a six-figure amount as W2 withholding at the last yearly payroll.

In the days when the S corp distributions grew to a larger multiple of my W2 income, I started paying quarterly estimated taxes, both federal and state. So these days, I simply look at the cash position of the S corps I own when the quarterly estimated payments are due. I take out much of the excess cash quarterly, leaving enough operating cash to have a reasonable cash cushion to operate the business, to pay generous bonuses to the employees, and to cover 401k and profit sharing contributions. I then pay estimated taxes equal to 37% federal on the quarterly S corp distribution, and do similar for state taxes at the highest marginal rate.

If there are major tax deductions coming that shelter some of the income, I might then adjust estimated tax payments downward based on the tax projections of my CPAs and the safe harbor rule to avoid tax penalties. If my estimated tax payments get lumpy, or if they are higher later in the year, there may be penalties owed for late payment. Hence the beauty of the outsize W2 withholding method.

But there is one more option, you can file form 2210 to justify the uneven estimated tax payments on the S corp over the course of the year. This will avoid any penalties.

One year, shortly after one of my favorite CPAs retired, the new CPA “forgot” to file form 2210 with the return. There was a significant penalty owed, but it got refunded after filing an amended return with the form 2210 properly completed. Unfortunately, it took over a year during Covid to get the IRS to look at the amended return and process the refund of the large penalty.

Overall, with the exception of the one year that the new CPA made a significant error, this method has worked out well. I like the fact that I pay taxes as I go when I take cash distributions. That allows me to invest the excess funds according to my IPS, without worrying about needed to have a separate stash of cash for taxes.

[Miracle Max]

Ultimately, you are going to need to pay estimates whether you distribute that money from the S-corp or not since it is passthrough. I usually just pay 110% of my prior year's total tax as income has gone up each year. It keeps things simple and has always been very close. Alternatively, figure out the income above your W2 and pay estimates on it like White Beard says. Obviously, if I was expecting a big drop I wouldn't do 110% of the prior year. If you have a big increase from year to year you can still just pay 110% without penalty, just be ready to write a big check come tax time.

Each quarter I pay myself my monthly paycheck, reimburse expenses via an accountable plan (home office deduction mainly), and distribute the rest of it, leaving a buffer for next month's FICA/income tax. My business and personal are at the same institution, so I just do ACH transfer instead of writing a check. Less of a hassle, and have been told it is acceptable as long as everything in documented in the books. Maybe some of the accountants on the boards have opinions.

[jacoavlu]

Yes that's the plan, write a check from my business account to myself.
The question is what's the best plan in terms of paying taxes on that money?
I do my own payroll and my accountant does taxes for me at the end of the year, so I was wondering how people usually pay the taxes on that throughout the year.

“best plan” is subjective

mathematically you probably want to pay as little as possible that still avoids penalty

convenience and simplicity are another matter

my guess most practices like mine cpa helps figure out estimated payment with quarterly bonus/distribution or something similar

[Random1]

Take extra taxes out of your w2 income , enough to cover the additional taxes for the S-corp income, you just pay with each paycheck and it will equal out at the end of the year.

[jacoavlu]

Take extra taxes out of your w2 income , enough to cover the additional taxes for the S-corp income, you just pay with each paycheck and it will equal out at the end of the year.

this is easy if you're just going to pay safe harbor amount. but if you're actually trying to match S corp income you're going to be adjusting withholdings throughout the year, and it ends up being easier just making estimated quarterly payments based on quarterly income numbers

[Alex2022]

The estimated tax payments are due quarterly, on Jan 15, April 15, June 15, and Sept 15. The estimated tax payment deadline is either 15 days before, or 15 days after the end of each quarter of the year, depending on the quarter.

In the days when my S corp distributions were smaller than my W2 income, I just increased my W2 withholding. The beauty of paying taxes through W2 withholding is the government counts the W2 withholding tax payments as paid equally throughout the year, even if you pay all of it on the last paycheck of the year. This method can help avoid late payment penalties. There were times in the past where I withheld a six-figure amount as W2 withholding at the last yearly payroll.

In the days when the S corp distributions grew to a larger multiple of my W2 income, I started paying quarterly estimated taxes, both federal and state. So these days, I simply look at the cash position of the S corps I own when the quarterly estimated payments are due. I take out much of the excess cash quarterly, leaving enough operating cash to have a reasonable cash cushion to operate the business, to pay generous bonuses to the employees, and to cover 401k and profit sharing contributions. I then pay estimated taxes equal to 37% federal on the quarterly S corp distribution, and do similar for state taxes at the highest marginal rate.

Thank you for the detailed response!

Follow up question: I'm planning to just put extra withholdings on my W2 since my S Corp distributions are less than my W2 income, based on what you said, I would assume there is no need to worry about any quarterly tax payments as long as my total tax payments over the year is sufficient?

If I do go the other route and pay quarterly taxes, what is the best method for doing that? When I was a sole proprietor, I just made payments on the IRS website and state tax website. Now I pay through EFTPS for my S Corp. I would assume that I still pay through the IRS.gov?

[White.Beard.Doc]

Thank you for the detailed response!

Follow up question: I'm planning to just put extra withholdings on my W2 since my S Corp distributions are less than my W2 income, based on what you said, I would assume there is no need to worry about any quarterly tax payments as long as my total tax payments over the year is sufficient?

If I do go the other route and pay quarterly taxes, what is the best method for doing that? When I was a sole proprietor, I just made payments on the IRS website and state tax website. Now I pay through EFTPS for my S Corp. I would assume that I still pay through the IRS.gov?

If you meet the safe harbor minimum tax with your W2 withholding, there is no need to make quarterly estimated tax payments.

When I pay my quarterly estimated, I do so on the IRS website and on my state tax website. It is quick and easy. I keep track of those payment amounts for myself and my CPA.