Quarterly taxes on an S-corp confusion

[Heroes821]

So I'm reading up on how to handle quarterly taxes for my s-corp.  I am probably doing this fairly late since Q1 payments are due next week, yikes!

My understanding is this. I set my reasonable salary lets say $150,000 because Married filing jointly that should still allow roth IRA contribution and a full cap of $54,000 into solo 401k for 2017.

Business income is expected to be $220,000 unless contract is renewed in which case 2017 income could be higher. Does this matter or do I only estimate for my salary?

I believe I only need to pay estimated taxes on the $150,000. but the form says AGI.  If I know that I will cap my HSA at $6750 and cap my solo 401k at $18,000, do I estimate my taxable income at $125,250? Or lower if I know I will have agi reducing expenses?

[Fishindude]

I'm no expert but owned an S corp. for many years.
We always paid quarterly taxes based on the company's quarterly income.  Personal income got taxed at each pay check.

[Heroes821]

That makes sense. So the full business income minus expenses will get taxed for S.S. and medicare regardless of if it makes it to my pocket as dividend or salary.  So I should only account for known business expenses like healthcare, payroll fees, etc.

Right?

[CareCPA]

No.
If you're an S-Corp, you get taxed for Medicare and SS on your wages only. The rest comes through as non-self-employment income, subject to income tax and not self-employment tax (i.e., not medicare and SS).
So your wages withholding should cover your wage income, and you'll want to pay an estimate based on (gross revenue - wages - other expenses) * tax rate *.25 (or whatever your applicable installment percentage is).

[jwright]

The SS/Med is only taxable on your salary, that's the benefit of the S-Corp.

You should have withholdings from your paycheck to cover the tax on $150,000 salary (and SS/Med).

You will have additional taxable income comprised of the net $70,000 ($220 revenues - $150,000 wages).  You also deduct all other business expenses to arrive at this net income for the S-Corp. 

So your AGI would be $150,000 salary, $70,000 S-Corp, ($6750) HSA.  But you have already paid in on the $150,000 through payroll deductions.  The quarterly estimates would be based on $63,250.

[Heroes821]

The SS/Med is only taxable on your salary, that's the benefit of the S-Corp.

You should have withholdings from your paycheck to cover the tax on $150,000 salary (and SS/Med).

You will have additional taxable income comprised of the net $70,000 ($220 revenues - $150,000 wages).  You also deduct all other business expenses to arrive at this net income for the S-Corp. 

So your AGI would be $150,000 salary, $70,000 S-Corp, ($6750) HSA.  But you have already paid in on the $150,000 through payroll deductions.  The quarterly estimates would be based on $63,250.

Ok got it that makes way more sense.  How does the employer contribution to the solo 401k factor in?

Also I'm sure google will have some good calculators, but do you have any recommendations for accounting for with holding?

[jwright]

Do you have someone or a company processing your payroll?  It seems like you could benefit from a professional, and there should be some cost effective alternatives.

You will need to complete a W-4 just as you would at any job, then use the IRS charts in the Circular E to determine how much to withhold (payroll programs will automatically calculate this).  You may want to include extra withholding so you don't have to worry about the estimated payments.  That's where the IRS calculator can help you.

The 401K is wages but not taxable for federal income tax.   So the company still pays $150,000 in wages, but the 401k amount goes to the administrator of the policy rather than to you directly.  This will reduce the tax you need to pay on your wages. 

[Heroes821]

Thanks Jwright.  Yeah I pay for quickbooks through my CPA and he's supposed to activate the payroll portion for me, but he's busy this time of year and we are still working through 2016 stuff.

I trust that he will give me solid advice on what I owe in Quarterly taxes and get the payroll set up as discussed properly, I am currently just trying to make sure I understand how everything is being calculated.

While I would love to do all my own taxes, I don't want to actually attempt an S-corp election on my own, but I do want to understand how it works the best I can.

[SeattleCPA]

So I'm reading up on how to handle quarterly taxes for my s-corp.  I am probably doing this fairly late since Q1 payments are due next week, yikes!

My understanding is this. I set my reasonable salary lets say $150,000 because Married filing jointly that should still allow roth IRA contribution and a full cap of $54,000 into solo 401k for 2017.

Business income is expected to be $220,000 unless contract is renewed in which case 2017 income could be higher. Does this matter or do I only estimate for my salary?

I believe I only need to pay estimated taxes on the $150,000. but the form says AGI.  If I know that I will cap my HSA at $6750 and cap my solo 401k at $18,000, do I estimate my taxable income at $125,250? Or lower if I know I will have agi reducing expenses?

Two comments...

1. You're very possibly setting your salary too high. Yes, that high salary lets you contribute more to a pension... but at the cost of way higher payroll taxes. You might find this blog did useful: http://evergreensmallbusiness.com/s-corporation-salary-rules/

2. Your AGI includes all your income so not just your W-2 but the amount shown in box 1 of the K-1 you get or will get from the S corporation.

[Heroes821]

So I'm reading up on how to handle quarterly taxes for my s-corp.  I am probably doing this fairly late since Q1 payments are due next week, yikes!

My understanding is this. I set my reasonable salary lets say $150,000 because Married filing jointly that should still allow roth IRA contribution and a full cap of $54,000 into solo 401k for 2017.

Business income is expected to be $220,000 unless contract is renewed in which case 2017 income could be higher. Does this matter or do I only estimate for my salary?

I believe I only need to pay estimated taxes on the $150,000. but the form says AGI.  If I know that I will cap my HSA at $6750 and cap my solo 401k at $18,000, do I estimate my taxable income at $125,250? Or lower if I know I will have agi reducing expenses?

Two comments...

1. You're very possibly setting your salary too high. Yes, that high salary lets you contribute more to a pension... but at the cost of way higher payroll taxes. You might find this blog did useful: http://evergreensmallbusiness.com/s-corporation-salary-rules/

2. Your AGI includes all your income so not just your W-2 but the amount shown in box 1 of the K-1 you get or will get from the S corporation.

Funny enough, SeattleCPA I always find your posts here really awesome and when I started asking these questions on google your blog was the top result, so I've been poking around your S-Corp advice already.

Using the link you used in 1) I think I was leaning toward the 60 40 idea.  The reason being that if this job gets extended and everything that is ongoing continues through December I could end up with Revenue of $264k and I'm not sure I'd be comfortable having a $100,000 or $127,000 Salary on those kind of profits as a single person consultant s-corp.  But I'm definitely open to hearing more reasons why that should be fine.

Can you explain number 2 more?  My Agi will include distributions from the K-1? Is this reaching a level where employing my wife as a book keeper/secretary for double retirement deductions?

[SeattleCPA]

So I'm reading up on how to handle quarterly taxes for my s-corp.  I am probably doing this fairly late since Q1 payments are due next week, yikes!

My understanding is this. I set my reasonable salary lets say $150,000 because Married filing jointly that should still allow roth IRA contribution and a full cap of $54,000 into solo 401k for 2017.

Business income is expected to be $220,000 unless contract is renewed in which case 2017 income could be higher. Does this matter or do I only estimate for my salary?

I believe I only need to pay estimated taxes on the $150,000. but the form says AGI.  If I know that I will cap my HSA at $6750 and cap my solo 401k at $18,000, do I estimate my taxable income at $125,250? Or lower if I know I will have agi reducing expenses?

Two comments...

1. You're very possibly setting your salary too high. Yes, that high salary lets you contribute more to a pension... but at the cost of way higher payroll taxes. You might find this blog did useful: http://evergreensmallbusiness.com/s-corporation-salary-rules/

2. Your AGI includes all your income so not just your W-2 but the amount shown in box 1 of the K-1 you get or will get from the S corporation.

Funny enough, SeattleCPA I always find your posts here really awesome and when I started asking these questions on google your blog was the top result, so I've been poking around your S-Corp advice already.

Using the link you used in 1) I think I was leaning toward the 60 40 idea.  The reason being that if this job gets extended and everything that is ongoing continues through December I could end up with Revenue of $264k and I'm not sure I'd be comfortable having a $100,000 or $127,000 Salary on those kind of profits as a single person consultant s-corp.  But I'm definitely open to hearing more reasons why that should be fine.

Can you explain number 2 more?  My Agi will include distributions from the K-1? Is this reaching a level where employing my wife as a book keeper/secretary for double retirement deductions?

So, first, about a $100K salary, you do need to be reasonable. But something like $100K or the FICA limit often does work. You may need to use tricks though... Like lots of fringe benefits correctly accounted for so as to push up your compensation package without pushing up your SE taxes. But then also keep these two examples in mind: Warren Buffet pays himself $100K a year... and John Edwards the former Democratic VP candidate paid himself $250K in salary and took another $25M in S corporation profits from his personal injury law firm. (Google either man and the issue for more details.)

Second, I think we all need to work from the same definitions... Say a business before paying the shareholder employee any wages makes $200K a year. Assume that the corp pays out $100K of this as wages. And assume the corp pays half of remaining $50K to the shareholder and then retains half.

In this case, wages equal $100K of course. This money is taxed. (Both income taxes and employment taxes)

The K-1 shows $100K as the box 1 distributive share. And this money is taxed too. (But just income taxes)

And then the K-1 also shows $50K as the distribution... and that number at least for this discussion has no income tax effect.

What the IRS can do, if they think the $100K figure is too low for wages is reclassify some or all of the $50K distribution as wages.

I mention all this because some of the confusion in this thread seems to stem from discussion participants working from different definitions of the term "distribution."

[Heroes821]

Ok I think I'm understanding this more now. I will need to understand distributive share and distribution more.

[Joeko]

I'm also an S-Corp.  I pay myself 127K.  Best benefit is the contribution of profits into the Solo 401K

[SeattleCPA]

I'm also an S-Corp.  I pay myself 127K.  Best benefit is the contribution of profits into the Solo 401K

You should make sure you understand the math.

E.g., dropping your salary by $10K saves you $1530 in payroll taxes.

If you do this, you will lose a $2500 employer matching contribution which will give you an immediate tax deferral benefit of, say, $1000 if your marginal rate is 40%...

But that $1000 isn't your saving. You'll going to have to pay some tax when you pull the money. If the marginal rate in retirement is 20%, say, you're looking at $500 in tax when you draw the money.

So you paid $1530 in payroll taxes to drop your income tax bill from $1000 to $500. Which doesn't work even if you adjust for the compound interest effect.

The above is a general overview... if someone is interested in really going into the weeds, this blog post might be worth a skim:

http://evergreensmallbusiness.com/paying-payroll-taxes-to-bump-pension-contributions/

[Joeko]

Thank you, excellent article.  Definetly need to consider this