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Say an S Corp has one owner and earns 300k in a year. It pays wages of 100k. Can the 200k be invested by the S Corp so that the the 200k does not have to be distributed?

  • Invested where? (If stocks and bonds, or "investing in" car that the owner's teen daughter exclusively drives, I don't think the IRS auditors would be very understanding. If investing a new warehouse to grow the business, they'd see that as a valid business expense.) – RonJohn Jan 4 at 18:38
  • @RonJohn - I don't know if OP meant invested in anything specifically. I took it to mean: leave it in the company's bank account for future use (buying tools, inventory, hiring employees, etc). – TTT Jan 4 at 18:41
  • @TTT he definitely needs to clarify that. – RonJohn Jan 4 at 18:46
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    @RonJohn - agreed, that would make it clearer. But leaving undistributed profits in an s-corp is commonly called "reinvesting" the profits. (Maybe OP just left off the "re".) – TTT Jan 4 at 18:48
  • @RonJohn, I currently own LLC and work as software consultant, I don't have any real expenses and am not planning on hiring people or buying new equipment. I was thinking of just putting money in mutual fund. – steviekm3 Jan 4 at 20:29
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Yes, but your use of the phrase "so that the the 200k does not have to be distributed" makes it seem like you're thinking distributions are mandatory, which isn't the case. Distributions are optional; nothing forces you to distribute the profits; you could leave the money in the company bank account if you wish or even "invest" in mutual funds or real estate.

Note the $200K profit would flow to the S-Corp owner as regular income, and income tax on that amount would be owed. Typically you would distribute enough to cover the tax owed, but you aren't required to. If you have enough personal funds to pay the tax without distributing it you can leave the entire $200K profit to reinvest in the company.

I'm going to assume that the $100K in wages is going to the owner too (because the owner should be taking a reasonable salary), in which case you would pay both sides of the FICA taxes on the $100K and income tax, whereas with the $200K profits only the income tax is owed whether you distribute it or not.

As a side note, your profits will actually be less than $200K, since you will certainly have deductions, one of which is at least 7.65% on the $100K for the employer portion of FICA.

  • "I'm going to assume that the $100K in wages is going to the owner too". Why can't it be a couple of employees (secretary and salesman, for example)? – RonJohn Jan 4 at 18:42
  • @RonJohn - it absolutely can be, but typically the owner should take a reasonable salary too, unless it is entirely passive income. – TTT Jan 4 at 18:43
  • And I don't think it explicitly answers the question "Can the 200k be invested by the S Corp so that the the 200k does not have to be distributed?" – RonJohn Jan 4 at 18:43
  • Does the owner take a salary or take regular distributions (which effectively mimic a salary, but tax wise are different)? – RonJohn Jan 4 at 18:45
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    @RonJohn - both. Owners who are involved in the business must take a reasonable salary. On top of that they can take distributions if they wish. Since distributions avoid FICA taxes, taking a very low salary is frowned upon. – TTT Jan 4 at 18:46

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