The IRS doesn't let S corps skip payroll tax just by calling it a distribution.

The IRS doesn't let S corps skip payroll tax just by calling it a distribution.

S corporations are an attractive structure because the owner can take some of their income as a distribution and avoid self-employment tax on that portion. But the IRS noticed that strategy a long time ago.

The rule: an S corp owner who works in the business has to be paid a reasonable W-2 salary first. Social Security and Medicare get withheld on that salary. Whatever's left over after reasonable comp can be taken as distributions, free of payroll tax.

If your client is paying themselves only out of distributions and skipping the W-2 entirely, the IRS will reclassify the whole thing as wages: back tax, penalties, interest. The audit doesn't go well.

When a client comes to you saying they're "just taking a draw" out of their S corp, that's the moment you need to walk them through the salary requirement. Most preparers don't.

The Tax Titan Transition Program walks you through the conversation and the math. Link in bio.

Видео The IRS doesn't let S corps skip payroll tax just by calling it a distribution. канала The Taxpert Academy