How to get hold of extra money if my company is LLC but elected to be taxed as S corp


2

I live in miami and am about to form an LLC. I have also decided that I would elect to have my LLC to be taxed as S corp. I will be the only employee for next 6 to 9 months.

Since it is a S corp I need to pay myself a salary. I have decided to pay myself a salary of $90K per annum which is reasonable for a software engineer in Miami.

Now let's assume that in a year the company's revenue is $160K. Expenses was like $20K on various things. Salary expense was $90k. So the total profit of the company is 160 - 20 -90 = 50K.

Now from this 50 reduce the social security + medicare . To keep it simple I am keeping that as 6k.

Net money still in bank = 50 - 6 = 44k

On this 44k I do not need to pay self employment tax ( social security + medicare). This is the main reason why I am in favor of electing to be taxed as S corp.

Here is my question:

When do I get hold of this $44K. Every month I am getting my salary. Do I need to wait for the year to end to get hold of this $44k.

If I want say 3k per month from this 44k then how do I do that. This is not my salary. It would be like earning bonus before the year has ended.

I am planning to use http://www.surepayroll.com/ for payroll processing.

Any thoughts.

Update: After posting this question I came to know that what I'm calling 'bonus' is technically called 'distributions'.

LLC Salary Setup

asked Jul 1 '11 at 05:33
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Nick Vanderbilt
11 points

1 Answer


2

You are correct that this "bonus" is a distribution or draw. I would not push this through your payroll processor since you don't want to treat it as W2 income. Write a check to yourself each month (or as often as you want) as a draw or distribution. That is an equity account not an expense account so it will not lower the net income of the business. Since you're electing for s-corp treatment the net income of the business will pass through to your income tax at your personal rate but as you noted you will not pay self employment tax on that income just income tax.

Since you're paying yourself a fair market wage as W2 income you shouldn't run into IRS problems with this. They do, however, keep an eye out for s-corp stockholders that have large draws and low W2 or 1099+self employment tax income. IOW you can't (shouldn't) use your s-corp to avoid social security + medicare taxes without a higher risk of an audit.

answered Jul 1 '11 at 09:09
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Jmp
191 points
  • Thanks for the reply. Let's assume that I am writing a check to myself of 3k per month as "distribution". At the end of the year when the company issues a W2 to myself it would indicate that I have earned 90K. However I still need to pay income tax on that 44k that I have earned. What legal document company should send to me to indicate that bonus was given. In short when a company issues bonus how does it reflect on your w2 or some other document? – Nick Vanderbilt 9 years ago
  • @Nick: Bonuses will be reflected in box 1 of a W2. – Zuly Gonzalez 9 years ago
  • Nick - The LLC will file a 1120S (since you have s-corp selection) and attached to that 1120S is a K-1 that specifies you as a stockholder and what percentage (100% since you own 100% of stock) of the net income of the LLC (including your distributions since those are not expenses) and **ALL** of that K-1 income (not just the 44K distribution) will flow to your personal 1040. – Jmp 9 years ago

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LLC Salary Setup