Forums: Discussions for entrepreneurs and small business.

I would like to expand upon the replies previously given. Basically, if you are a shareholder of an S Corporation, this makes you an employee of the company. (even if it is a 1 person S Corp) When you only take distributions in lieu of a salary, you are only reducing your equity in the company. These distributions are not deductible as business expenses.Additionally, if the S Corp is making good money and all you are taking is distributions, then in the eyes of the IRS you are essentially failing to pay payroll taxes. Because the net income that flows through to your personal tax return on the K-1 comes through as ordinary income NOT subject to self-employment taxes. So - as I mentioned - if the company is making good profits and there is no "shareholder salary" on the corporate tax returns, the IRS can - at their discretion - reclassify some of your profits and charge you for back payroll taxes plus interest and penalties on whatever they consider to be a normal salary for someone in your particular field - according to the profits of the business. To be on the safe side, I would suggest that you start to pay yourself a salary. You can always get ADP or a similar payroll service to do all this paperwork for you. They can file all your quarterly payroll tax reports and year end tax filings for a minimal fee.