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No that is not going to work. Keeping money in the business is called "retained earnings." Only C corporations or regular corporations are allowed to retain e
by camz 16y ago
No that is not going to work. Keeping money in the business is called "retained earnings." Only C corporations or regular corporations are allowed to retain earnings. Pass-through entities such as partnerships and S-corporations are required to pass any income to the owners regardless of whether cash or any other form of income is distributed.
If you want to reinvest into the company, then you'd have to pay taxes on the distributed income and then put the after tax money back into the business, which would increase your tax basis in the company. This would allow you to take net operating losses in the future as well as help you if you ever sell the company.
Hope that helps. Keeping money in the bank won't help you in this situation.
- DenisM 16y agoThanks for your reply. Just to be sure I understand you correctly, which one (if any) is true: If an S-Corp makes money, it is assumed that the earnings are distributed and thus both personal income tax (on the entire earnings amount) as well as payroll taxes (on the reasonable wage) have to be paid. Or: If an S-Corp makes money, it is assumed that the earnings are distributed and the personal income tax has to be paid (on the entire earnings amount), but payroll taxes don't need to be paid.
- camz 16y agoOption 1 sounds about right. All distributions are going to be tax on your personal income tax and exempt from payroll taxes. Reasonable wages are NOT corporate distributions, they're simply wages paid by the corporation and deducted as an expense. The payroll taxes would be paid on the amount that you deem wages through the corporation. Please note, payroll taxes are also deductible. hope this helps