I understand that I have to carefully apportion the net income between a reasonable salary and distributions. However, it's difficult to determine my overall tax picture until year's end, because of the mentioned variability. Also, I don't want to leave a significant amount of cash in the s-corp's bank account, as it earns no interest there. My dilemma is: how to invest my income without 1) waiting until the end of the year to do it, or 2) having to decide between salary / distribution every month.
My tax preparer has suggested that I pay no salary until the end of the year, when I will determine the correct amount of salary & pay it as a lump sum "salary bonus", which will be considered by the IRS to have been paid throughout the year for tax purposes. He has also suggested that since the s-corp is a flow-through entity, I can move money out of the business account into higher interest personal accounts as soon as it is earned, and don't have to cut myself physical salary checks throughout the year. Questions:
1) Is it reasonable to have my salary paid as an annual lump sum? I assume I'd I be better off paying a low salary on a quarterly or monthly basis, then "correcting" at year's end via a bonus - but I'm not sure how to do this without leaving a significant amount of income sitting in the business account all year (see #3 below).
2) If I transfer most of the money out of the business bank account in order to make interest on it, there may not be a large enough balance at year's end to pay my salary bonus & associated FICA. If I then move money back into the business account for that purpose, wouldn't it need to be categorized as a loan or capital contribution? (Thus generating a net loss for the S-Corp for the year.) It seems unlikely that I could just "put the money back" at the end of the year, in preparation for paying my salary.
3) If money transferred out during the year is classified as a salary bonus at the end of the year, won't I run afoul of monthly Federal Tax Deposit requirements, given that the actual transfers took place earlier in the year?
4) Maybe it would be best to pay some low percentage (50%?) of income out as salary on an ongoing basis (with associated monthly tax deposits), and 40% out as distributions. At the end of the year, I'd re-classify some of those distributions as salary, generating back- payroll, & pay the (late) tax deposits + penalties out of the 10% that remained in the business account.
Overall: Is there any way to move most/all of the income out of the (low interest) business account during the year, without committing to a salary number until year's end? It seems if I underestimate during the year, I'll owe late tax deposit penalties, and if I overestimate (for instance by basing it on 100% of last year's tax), I'll have lost the employer's share of FICA on any unnecessary salary paid during the year.**
* - Actually - it's an LLC with elected S-Corp tax status, and I am the sole member. Why I went this route vs. a "straight" is another discussion. For the purposes of this post, just take it as written.
** - Example: Business grosses $100k in the first six months, with $10k in expenses. I pay $70k as monthly salary, sending 15.3% to the IRS. In the second six months, business grosses $0, and has $30k in expenses. I've ended up paying FICA on at least $10k unnecessarily, only half of which is recoverable via my personal return.
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