How to actually do a shareholder disbursement for S-corp?

[monstermonster]

I'm hoping you smart people can help with this! So I'm working part-time helping my friends that have an S-Corp. They're husband and wife and own 98% of this S-Corp they also both work for as W-2'd employees. Their (not so great) strategy for the past couple years has involved leaving all the cash flow in their business checking, and then only taking what they need out of the company to live in W-2 income -different each month, averaging around ~5K/month between the two of them (low).

They have never done shareholder disbursements, but I think taking advantage of the S-Corp loophole would be good as long as the shareholder disbursements are significantly lower than their W-2 income.

However, right now, they need to buy a car in cash (less than <$10,000) and all the cash pretty much sits in the business account. Either we can run payroll for them with enough hours in W2 income they can get $10K after tax OR figure out a shareholder disbursement of ~$10K. Can they literally just take the money out of the business account? Should I have our fairly useless online bookkeepers note it on a 1099-MISC or something for them?

Also, do they need to give their two non-employed 1% shareholders a disbursement of equivalent amounts relative to their shares (like $102 or whatever) for this to be legit?

[CareCPA]

Yes, just write a check to take a distribution. Distributions must be done pro-rata, so if there are other shareholders they must also get a distribution in the same percentage as their ownership.

ETA: no 1099 for a distribution.

[monstermonster]

Yes, just write a check to take a distribution. Distributions must be done pro-rata, so if there are other shareholders they must also get a distribution in the same percentage as their ownership.

ETA: no 1099 for a distribution.

This is exactly what I was getting out of. With $200 or whatever of minority shareholder distributions, that's still dazzlingly  tax efficient. I should warn all minority shareholders that they will be taxed at their marginal tax rate on that like $100 or whatever, right?

[CareCPA]

Yes, just write a check to take a distribution. Distributions must be done pro-rata, so if there are other shareholders they must also get a distribution in the same percentage as their ownership.

ETA: no 1099 for a distribution.

This is exactly what I was getting out of. With $200 or whatever of minority shareholder distributions, that's still dazzlingly  tax efficient. I should warn all minority shareholders that they will be taxed at their marginal tax rate on that like $100 or whatever, right?

No. S-corp income is taxed when earned, not when distributed. Distributions are generally nontaxable (exceptions exist if they don't have enough basis).
For the purposes of good records, they should really have a set compensation amount based on a market analysis.

[monstermonster]

No. S-corp income is taxed when earned, not when distributed. Distributions are generally nontaxable (exceptions exist if they don't have enough basis).
For the purposes of good records, they should really have a set compensation amount based on a market analysis.

Hmm, they're both pulling in relatively small W-2 income for themselves compared to market-level software developers (CTO/CEO) preferring to keep the bulk of the money in the business accounts instead of their personal accounts - the business doesn't make enough to pay them each market rate for those positions right now. Wondering if despite the tax benefits I should make them take the income as W-2 to avoid possible ire of the IRS.

[CareCPA]

As we just went through in another thread, if they have employees other than themselves it's still relatively easy to justify distributions even if they themselves are being paid below market. It just depends on the circumstances.

[monstermonster]

As we just went through in another thread, if they have employees other than themselves it's still relatively easy to justify distributions even if they themselves are being paid below market. It just depends on the circumstances.

Oh! Great. They have two market-rate W2 employees and several market-rate contractors. I'll try to hunt down the other thread- search is terrible on the forum, unfortunately.