S-Corp Estimated Tax Payments

Question

I plan on splitting my s-corp income 50/50. I hope to make 80K this year, 40 on payroll, the other 40 as distributions (s-corp income). I’m figuring the first 40K will be, mostly, at the 15% bracket. The rest, in the 25% bracket.

My question is regarding my estimated tax payments for federal. I understand that the S corporation distributions are not subject to the SS and Medicare tax, which looks to be at 15%. That said, I was going to estimate my taxes on the distribution half at 10%. So, I’m coming up with (40K * 10% == $4,000). Does this look about right? It seems low to me.

By the way, I'm already doing payroll and making payments on the first 40K.

Answer 1

Form 1040-ES has a worksheet that will walk you through the process of figuring out your estimated taxes--it's fairly straightforward.

SS and Medicare taxes do not figure into estimated taxes, as they are part of the payroll process.

Edit from comments

So the 25% federal bracket, does that not include SS and Medicare then?

Correct, your federal tax rate is completely unrelated to payroll taxes. Everyone pays the same rate, regardless of tax bracket (although SS tax maxes out at a certain income level).

Are you saying I should estimate the payments on the full 25%?

Hmm, I'm actually not sure what you mean by "the full 25%"? But it's actually simpler than you're making it, I think. If your income will be $80K this year, use that number as the starting point for filling out the worksheet. That amount will be income regardless of whether it is payroll or distribution, and should be the basis for estimated tax payments.

Note that this assumes $80K is your net income--revenue minus expenses. Expenses will include employer-paid payroll taxes (for your and any employees).

I'm using intuit payroll for myself and my employees.

I use a different payroll provider, but assuming intuit is similar, they should be withholding the correct taxes from you and any employees, and also making the quarterly payments for both those withholdings and your payroll tax responsibilities (as the employer).

Answer 2

I hope to make 80K this year, 40 on payroll, the other 40 as distributions (s-corp income).

What's the basis of this split? How much of your earnings are attributable to something that is not your own personal services?

I understand that the S corporation distributions are not subject to the SS and Medicare tax

Here lies the problem: you're doing tax evasion. If the sole reason for S-corp is to allow you not to pay FICA taxes on what is otherwise income attributed to your personal services, it will get you in trouble with the IRS. I know there are a lot of not very honest people out there saying "it is legal" but it is not really.

Generally, the IRS wins prosecution on these cases pretty easily. Unless you can show that the "reasonable" compensation for your line of work is the minimum wage, I doubt you can justify the 50/50 split you're planning to do. If the reasonable compensation is indeed the minimum wage, then how did you get to the $80K to begin with? See the problem?

The S-Corp distributions split is intended for employers to not pay FICA/earned income taxes on earnings based from the work of others (their employees), while avoiding the corp double taxation trap. For sole proprietors, S-Corp is useful mostly as a liability shield (many professionals are not allowed to work under LLC in many States, so doctors, attorneys, accountants - form S-Corps instead).