S corporations
The election is easy. The salary is the hard part.
An S corporation is not a kind of company. It is a choice a company makes about how it is taxed — and the day that choice takes effect, the owner stops being somebody who takes draws and becomes somebody running a payroll with himself on it.
That is where nearly every S corporation problem starts. Either there is no salary, or there is one and nobody can say how the number was arrived at. The tax the election was supposed to save gets spent defending it.
This is the largest group of business returns this firm files. Most of what follows is not complicated — it is just never written down anywhere the owner can read it.
Is this you?
If more than one of these is true, the rest of this page is written for your situation.
You own all or most of a company that files its own return, and the profit lands on your personal return whether or not you took the money out.
You pay yourself, and the figure was decided once — by you, by a payroll company, or by whoever set the company up — and has not been revisited since.
You take distributions, and nobody has explained why some of them could be taxable and others are not.
You elected S status to save payroll tax and have never been told what the election costs on the other side.
You own more than one company and money moves between them.
An accountant left, or a notice arrived, and the basis schedule cannot be found.
None of them fit? Then describe the situation rather than matching it to a list. The first conversation is free, and it is usually shorter than people expect.
The six things that decide an S corporation return
In roughly the order they cause trouble.
LLC or S corporation
Whether you should elect it at all
An LLC and an S corporation are not alternatives. Most S corporations in Florida are LLCs that made the election — so the question is not which entity to be, it is whether to be taxed as one.
The election is worth making when the profit is large enough that the payroll tax it saves exceeds what it costs: a payroll to run, a separate return to file, a basis schedule to keep, and far less room to be casual about how money comes out of the company. Below that point it costs more than it saves.
The election gets made on a rule of thumb years before the profit justifies it — and then nobody wants to undo it, because undoing it has its own cost.
Reasonable compensation
What you pay yourself, and how the number was arrived at
A shareholder who works in the business has to be paid a reasonable wage for that work. The law does not publish the figure, and there is no safe percentage — the one people repeat to each other is a rule of thumb, not a standard.
What makes a salary defensible is the reasoning behind it: what the role actually is, what it would cost to hire somebody else to do it, and how much of the profit comes from your own labor rather than from capital and other people's work. Written down at the time, in the file, rather than reconstructed later.
The figure is rarely challenged on its own. It gets challenged when the salary is small, the distributions are large, and there is nothing in the file explaining the gap.
Shareholder basis
The number that decides whether a distribution is taxable
Basis is what you have put in, plus what the company has earned, less what you have taken out and less the losses you have already used. It moves every year and it is tracked per shareholder.
It matters in two places: a distribution above your basis is taxable, and a loss is deductible only to the extent you have basis to absorb it. Both are routine while the schedule is kept. Neither is routine once it has to be rebuilt from old returns.
Basis is the single most common thing missing when a client arrives from another preparer. The returns filed fine for years because nothing forced the question — until a loss year, a large distribution or a sale did.
Distributions
Taking money out, and the order it comes out in
A shareholder is paid two ways: wages through payroll, reported on a W-2 and subject to payroll tax, and distributions, which are not. The split is where the saving lives, and it is also where the exposure lives.
Distributions also have to respect ownership. If two people own the company, money going out that does not follow the ownership percentages is a problem whether or not anybody intended one.
Paying personal expenses out of the company account and treating them as nothing. They are distributions, and they count — including toward the basis question above.
Eligibility and one class of stock
The things that end the election without anybody filing anything
S status comes with rules about who may own the stock and how many owners there may be, and with a requirement that there is only one class of stock — meaning every share carries the same rights to distribution and liquidation.
Bringing in the wrong kind of owner, or signing an agreement that gives one shareholder a preference, can terminate the election. Not by a filing. By operation of the rules, and usually discovered a year or two later.
A buy-sell agreement or an investor side letter drafted without the S election in mind. The document does exactly what it says, and the election is gone.
The return and the K-1
Filing, and the personal return that has to agree with it
The company files its own return and issues a K-1 to each shareholder. The personal return has to agree with it, which makes the two a single piece of work rather than two jobs that happen to meet in April.
The company return is due before the personal one, and extending one does not extend the other. Every date that applies is on the tax calendar, each with its source.
A K-1 that arrives after the personal return has been filed means an amended return. The order is not optional, and it is the easiest thing on this page to get right.
No limit, threshold, rate or dollar figure appears on this page, on purpose. Those move every year, and a stale number under an accounting firm's name is worse than no number at all. Anything with a date on it lives in the Tax Center, where every entry carries its source and the day we checked it.
Where to go next
Every deadline that applies
The company return, the K-1, and the extension that is not an extension of the other one — federal, Florida and Miami-Dade, each date with its source.
Not a company yet
If there is nothing to elect on, start there. What to open is a different conversation from how to be taxed, and it comes first.
What your trade deducts
A guide per industry, each ending in the one thing that trade gets wrong most often — the part the software will not catch.
Put your name down
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Let's look at what you're paying yourself.
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