s corporation and owner's draws?

most CPA's advice the 60% salary and 40% distribution for the owner's draw or rather the term is shareholders.

i just need some clarification. the 60% salary would be a payroll check minus the social security & medicare taxes. and the distribution is just straight pay w/out any taxes deducted right?

but is the corporation still responsible for paying for the shareholder's withheld social security & medicare taxes???

7 years ago - 2 answers

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An S-Corporation works just like any other corporation with respect to income, balance sheets, etc. The difference is that its bottom line profits are not taxed to the corporation. Rather they pass through to the owners in accordance with their percent ownership.

Withholding on the payroll portion in your example works for the owner just as it would any non-owner employee. Distributions are a return of capital. As such they are not deducted by the corporation nor are they income to the employee/owner. (They do become taxable if they begin to exceed initial capital plus retained earnings).

So, you pay tax on your salary and your portion of the corporation's earnings. Distributions do not affect taxes except as noted above.

I don't know where you get the 60/40 split. My CPA never heard of any such rule of thumb. The key point is that the "split" is such that the salary is reasonable for the job being done and that the owner is not artifically lowering the salary and boosting the corporate profits. Why? Since Medicare taxes have no upper salary limits the IRS assumes that the owners will try to keep owner's salaries down to avoid Medicare taxes, which are only collected on salary. Every dollar you can shift from owner salary to S-Corp income saves a total of about 3.5 cents in Medicare taxes. Otherwise, every thing else stays the same.

So, if you are the sole owner of an S-Corp that makes buckets of money and you pay yourself a salary that would be competitive with similar positions in like companies you'll be fine regardless of what the "split is". On the other hand if you "underpay" yourself and put lots into the S-Corp's bottom line you are raising a red flag.

7 years ago

Other Answers

the salary would include payroll deductions....the distribution is after-tax to the corporation and pre-tax to the shareholder

by Tiberius - 7 years ago