I am putting together a business plan for a s-corp and trying to figure out how the taxes will work.

Below is the scenario and my understanding:

  1. S-corp shareholders: 2 partners (husband & wife)
  2. Partners are also the employees
  3. Company's earnings (a): 200,000
  4. Partner 1 gets paid 50,000
  5. Company deductions (milage, home office, etc.): 10,000
  6. Company's 401(k) contributions: 17,500
  7. Company's net profit: 122,500 (3-(4+5+6))
  8. Dividend distributed between partners: 122,500/2 = 61250
  9. Partner 1's gross income: 50,000 + 61250: 111,250
  10. Partner 2's additional Adjusted Gross Income (w2): 84,000
  11. Partner 2's gross income: 84,000 + 61250: 145,250

Joint tax filling

Partner 1 & 2 will file taxes jointly.

  1. Joint income: 256,500 ((9) + (11))
  2. 401(k) for both: 50,000
  3. Other deductions (mortgage, etc): 25,000
  4. Adjusted gross income: 181,000

Is this understanding/math correct?

  • 1
    The math doesn't add up. Where are the $84K coming from? – littleadv Nov 14 '13 at 7:16
  • Are you referring to 84K in point 10? Partner 2 has a full time day job as well and gets paid as W2 from his employer. This gig is completely independent of the s-corp. – josh Nov 14 '13 at 12:37
  • So where's that partner's S-corp salary? You said he's an employee. – littleadv Nov 14 '13 at 19:38
  • and the 17.5 for 401k in $6 should be part of the 50K in #4, shouldn't it? Or are you referring to the match? If so - why the additional $50K in number #2 in the next list? – littleadv Nov 14 '13 at 19:39

I think you're misunderstanding how S-Corp works. Here are some pointers:

  1. There are no dividends in S-Corp. Only distributions.
  2. Distributions to owners who own 2% or more are considered self-employement unless you can show otherwise.
  3. If your owner is an employee - he must get paid and get W2. Your partner 2 doesn't seem to be getting any although you said he's an employee.
  4. 401K is limited to the actual earnings, and the match+contribution cannot exceed $51K. Also, the company contribution cannot exceed 25% of the profits. See here about Solo 401k (although your partners are two, since they're married - they can still go with Solo).
  5. Home office cannot be a company deduction, its the employee deduction. Company doesn't own the home. Thus you cannot deduct it from the company earnings, but as unreimbursed employee expense subject to 2% threshold.
  6. Additional taxes and expenses you didn't cover: FUTA, workers compensation, FICA employer's match, and SE tax on the distributions of the contributing partner (it seems like only one will actually be working in the corp). Also, payroll expenses (the fees to a bookkeeping/accounting firm to do your payroll and file the payroll tax returns for you).
  7. 401K for both cannot be $50K. Each is limited at $17.5K, so for both cannot exceed $35K.

I suggest you talk with a EA/CPA licensed in your state and get yourself educated on what you're getting yourself into.

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