S Corp Tax question - help

[Frank]

Hello All,

I would appreciate any help available .

I have S Corp starting beginning of 2020. Started doing payrol with an accountant in June 2020. I still pay quarterly estimated taxes. My payrol for 2020 reflects w2 for 6 months only as salary and rest as distribution which I believe does not sound right. What is the best way to circumvent this for tax year 2020. when you start payrol in the middle of the year. I am all set for 2021 at least now.

Thanks

[DavidGlennCPA]

All that matters is the total for the year on the salary. So even though you started mid-year with payroll the total salary for the year needs to be reasonable for the services you provide to your S-corporation.

It's also important to note that in an audit setting the IRS cannot increase your salary above the distributions you received. In an extreme example if you took no distributions you would not need to pay yourself a salary.

[jfoxcpacfp]

Agree with David. Also, note that it is common to take a lower than typical salary in the first year and distributions as profits are available (maybe less, maybe more) until you are on your feet and comfortable that you are going to achieve projected revenue. Work with several startups who I have advised do the same.

I’m not sure what you mean by “circumvent”.

[DavidGlennCPA]

To expound on this, I've had clients be able to go the first two years of using an S-corporation without taking a salary because we made sure they took no distributions during that time or contributed enough money back in by the end of the year so there were no net distributions.

Their practice was just getting going and they had other sources of income to live on which made it possible.

That only works for a year or two because eventually they need to start taking the money out as distributions.

IRS Fact Sheet 2008-25 lays it out pretty clearly.