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S-corp shareholders receive periodic income distributions and may receive tax-incentivized fringe benefits. Shareholders must make quarterly estimated tax payments and receive a “reasonable” salary. They are subject to tax liability for salary income and company earnings. Shareholders must vote on company matters and review issues before voting.
An S-corp shareholder can expect periodic distributions of income from the company and will have to pay taxes on that income, using personal income tax records. Additionally, shareholders may be provided with fringe benefits with tax incentives, such as deposits into tax-free retirement accounts. People who are shareholders in an S corporation need to be aware that they are required to make quarterly estimated tax payments if they are to avoid tax penalties whether or not their distributions have already come in.
S corporations are organized under a pass-through method of accounting, in which the money earned by the corporation is paid to shareholders immediately, in proportions appropriate to their percentage ownership. Under the US Tax Code, an S corporation must have fewer than 100 shareholders, all of whom accept classification as an S corporation and must be US citizens. These employee-shareholders may include friends and family members of the company’s founders.
Every employee-shareholder of S-corp is paid a “reasonable” salary, in addition to receiving benefits. The salary deemed “reasonable” is not set in stone, but is generally based on what people in similar positions would earn. Someone who serves as a CEO, for example, should have a salary comparable to that of a CEO in a regular company. If shareholders are offered unusually low salaries, this will be a red flag for the tax authorities and everyone is expected to receive at least some compensation, even when the company is losing money.
The S-corp shareholder is subject to tax liability for salary income, as well as the company’s earnings distributions. People also have to pay Social Security and Medicare taxes. An accountant can help people determine their tax liability and generate documents for estimated tax payments to facilitate the filing of those payments. If overpayments occur, the overpayment can be claimed on a tax return and will be returned to the S-corp shareholder by the Internal Revenue Service.
An S-corp shareholder should be aware that even if the income is not distributed, there is still a tax liability. In general, corporations have rules that people must receive enough in their distribution to cover estimated taxes, to address this possibility. As shareholders, people are also expected to vote on matters related to the running of the company. It is important to carefully review the issues brought to the vote, to ensure that they are fully understood. If there are any questions or concerns, they should be discussed before voting.
Smart Asset.
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