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owners draw

Good Morning Linda:

I am single owner that has an Scorp. Each month I pay myself reasonable salary through Payroll Service, and they deduct my Federal Income Tax and Payroll taxes and deposit taxes on my behalf. I was wondering can I do an
owners draw each month ? on top of my monthly salary.

Some one suggested that it is OK to do that. Also If I draw each month do I need to pay any taxes on it? I understand that it comes right out of my company's cash account and will lower my basis.

Thanks

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S-Corp Distributions

First, let's make sure we're using the same words... "Draw" refers to the profits a sole-proprietor takes out of the company. "Distribution" refers to a similar payment to an S-Corp shareholder. The difference is that the draw is subject to self-employment tax but the distribution is not.

Yes you can do this. However, I would be a bit wary of taking it on a regular basis. It might start looking like salary to the IRS (which means it would be subject to employment taxes & withholding).

What the distributions are is a withdrawal of current or previous year's profits. The distributions are not a deduction to the company, so you will end up paying income tax on that indirectly.

For example if your profit in the company is $50K and you take a distribution of $30K, the $50K shows up on your 1040 as income. The $30K is "included" in the $50K.

You'll end up paying tax on that $50K regardless of any distributions. As an S-Corp shareholder, you always need to make provisions for the taxable income from the corp. That could be through extra tax withholdings on your salary or through estimated payments.

Hope this helps!
L:)

Draw is not Taxable

Just to clarify, a draw by a sole proprietorship is not taxable per se. The profits of the sole proprietorhip are taxable for SE and income tax purposes regardless of draws.

S-Corp Distributions

Linda,

Please help me understand the issue of S-Corp "Distributions."
I am the sole owner of my S-corp, and I pay myself a
"reasonable" salary. In addition, I pay some of my personal bills directly from my S-corp checking account.
I have never really oficially taken money form the S-corp and called it a "distribution".
Is there some "official" procedure I should be using to take distributions from the company, or are the personal bill payments I make from the S-corp account considered distributions??

You <> Your S Corp

Hi Eric,

You are not your S Corp. :) You and the corporation are two separate legal entities. Your corporation shouldn't be paying your personal bills. In the future, you should use your wages to pay your personal bills.

To make a distribution the S-Corp should write you a check (or on-line transfer is ok). Make sure to indicate in the memo that it's a distribution. You'll need to report the total distributions on the S-Corp tax return.

As to the previous transactions, I would probably consider them distributions.

Make sure you're not paying business expenses out of your personal funds either. Your company should reimburse you for any business expenses you've paid personally. If there have been any earlier this year, maybe that will offset the personal bills you've been paying from the corp.

Hope this helps...
L:)

Could I be in trouble??

Linda,

In the 6 years of my S-corp business, I have never taken a distribution in the way you have described. I have always just written a company check to pay some of my personal bills whenever my wages were not enough. I have never reported any distribution on my S-corp return. I was under the impression that since all of the S-corp profits,(inculding any distributions), were reported on my personal return, that was all I needed to do.
Is there a problem with the way I have been doing it?
Could I be subject to any penalties or problems with the IRS??

Thank you,
Eric

Business vs. Personal

If you're deducting the personal bills paid as business expenses, then, yes you could be in trouble. If not, then you're probably not in any trouble.

However, the distributions are supposed to be reported on line 16d of the 1120S.

L:)

Reporting Distributions

No, I do not deduct the personal bills as business expenses.

However, I have never reported any distributions on my 1120S. All of my S-corp profits are reported on my 1040.
Do you see any problem(s) with this.

Thank you,
Eric

Distributions

Probably not. But you should start reporting it correctly going forward....

L:)

Paying personal bills through S-corp account

Linda, you're great for answering so many questions for me!
However, I have one more question on this topic.

I established my HRA plan back in January. However, I have
paid some of my premiums and other medical expenses directly from my S-corp checking account.

Will this affect how my deductions should be taken?

Thank you,
Eric

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