Calculation, timing, and taxes related to profit distribution of an S-corp?

Question

My life partner and I opened an S corporation at the start of 2015. My life partner will be employed by the S-corp and we've established a reasonable salary for him. I won't be employed by the S-corp, but I am a shareholder. We will bill our clients periodically and will get paid monthly.

Questions

1. Is there a set period of time for when we can distribute the profit? Meaning, can we split the profits of the company at end of each month or two months? Would the IRS care about this, and should this be something written in the policy of our company? For example: "Every two months, the profits get divided 50/50."

2. Is it best to pay all expenses before dividing the profits? Example: Company made $100 at end of January. Our expenses were $60. So, 100-60 = $40. We then divide $40 50/50.

3. We plan to use Schedule K when filing taxes for 2015. I've never filled a Schedule K before, will the profit distributions be reflected on this form?

4. We might need extra help in 2015, so we plan to hire an additional employee, who will not be a shareholder. Will our tax liability go down by doing this?

5. Are there certain other things that should be kept in mind to reduce the tax liability?

Answer 1

We will bill our clients periodically and will get paid monthly.

Who are "we"? If you're not employed - you're not the one doing the work or billing the client.

Would IRS care about this or this should be something written in the policy of our company. For example: "Every two months profits get divided 50/50"

They won't. S-Corp is a pass-through entity.

We plan to use Schedule K when filing taxes for 2015. I've never filled a schedule K before, will the profit distributions be reflected on this form?

Yes, that is what it is for.

We might need extra help in 2015, so we plan to hire an additional employee (who will not be a shareholder). Will our tax liability go down by doing this?

Down in what sense? Payroll is deductible, if that's what you mean.

Are there certain other things that should be kept in mind to reduce the tax liability?

Yes. Getting a proper tax adviser (EA/CPA licensed in your State) to explain to you what S-Corp is, how it works, how payroll works, how owner-shareholder is taxed etc etc.

Answer 2

2. Is it best to pay all expenses before dividing the profits?

It's whatever you decide. Taking money out of an S-Corp via distribution isn't a taxable event. Practically speaking, yes, you should make sure you have enough money to afford the distribution after paying your expenses, lest you have to put money back a few days later in to pay the phone bill. You might not want to distribute every penny of profit the moment you book it, either -- keeping some money in the business checking account is probably a good idea. If you have consistent cash flow you could distribute monthly or quarterly profits 30 or 60 days in arrears, for example, and then still have cash on hand for operations.

3. We plan to use Schedule K when filing taxes for 2015. I've never filled a Schedule K before, will the profit distributions be reflected on this form?

Your net profit is reflected on the Schedule K for inclusion on your personal tax return. As an S-Corp, the profit is passed through to the shareholders and is taxable whether or not you actually distributed the money. You owe taxes on the profit reported on the Schedule K, not the amounts distributed.

You really should get a tax accountant. Long-term, you'll save money by having your books set up correctly from the start rather than have to go back and fix any mistakes. Go to a Chamber of Commerce meeting or ask a colleague, trusted vendor, or customer for a recommendation.