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This question relates to form 2210, Underpayment of Estimated Tax by Individuals. However, since the income is derived from S-Corp wages and K-1 distributions I thought this forum might be a good place to start.
I've owned an S-corp for 30+ years. I am the only shareholder. We are a manufacturer.
Doing my own corporate and personal taxes via Quickbooks all the past years. I decided to turn over the taxes to a professional this past year, due to changes with S corp tax rules. He pointed out that since the company has had some very profitable years recently, my "reasonable salary" needed to be increased. I'm okay with that however the timing of when a reasonable salary is determined is my question.
Let's assume, for example the following simplified numbers:
Gross sales $500k,
Expenses $300k, and I had been drawing a salary of $70k included in these expenses.
Net Income near year end $200k
To make the salary more reasonable I paid my self a bonus in December of $100k, so for moment the total income I am taking at years end is $170k; let's guess for the moment the IRS feels that is reasonable in light of my experience and duties.
The Net Income when the books are closed becomes $100k which is reported on my K-1.
During the course of the year taxes have been taken out of the $70k annual income, and in December when I paid myself the bonus taxes were taken out as well.
Moving over to the personal taxes I need to complete form 2210 to determine whether I had paid my fair share of taxes when required for each of the 4 periods.
I respect my accountant's work. He is straight shooter. However he has suggested that I should have 'amortized', for simple terms, the $170k salary across all 4 quarters in form 2210 because that is what my reasonable salary should have been. Whereas I would amortized only the $70k across the 4 quarters and plopped the $100k bonus in the 4th quarter because that is when it was paid out.
When I look at my P&L every month or every quarter and the numbers are positive, we are making money, it is my preference to keep those funds there in the cash account in case of unexpected need for capital expenses, need to procure inventory, or as a cushion in case the stuff hits the fan. If I was too take a larger salary or bonus prematurely and suddenly sales ran flat, we had a major need for cash I, then I would find myself taking out a loan to make things meet.
So, is my preference in taking a smaller than reasonable salary during fiscal year and paying out a bonus to make things more reasonable salary wise the last month of the year, and reporting that income as it was accurately earned in the respective form 2210 periods acceptable?
I've owned an S-corp for 30+ years. I am the only shareholder. We are a manufacturer.
Doing my own corporate and personal taxes via Quickbooks all the past years. I decided to turn over the taxes to a professional this past year, due to changes with S corp tax rules. He pointed out that since the company has had some very profitable years recently, my "reasonable salary" needed to be increased. I'm okay with that however the timing of when a reasonable salary is determined is my question.
Let's assume, for example the following simplified numbers:
Gross sales $500k,
Expenses $300k, and I had been drawing a salary of $70k included in these expenses.
Net Income near year end $200k
To make the salary more reasonable I paid my self a bonus in December of $100k, so for moment the total income I am taking at years end is $170k; let's guess for the moment the IRS feels that is reasonable in light of my experience and duties.
The Net Income when the books are closed becomes $100k which is reported on my K-1.
During the course of the year taxes have been taken out of the $70k annual income, and in December when I paid myself the bonus taxes were taken out as well.
Moving over to the personal taxes I need to complete form 2210 to determine whether I had paid my fair share of taxes when required for each of the 4 periods.
I respect my accountant's work. He is straight shooter. However he has suggested that I should have 'amortized', for simple terms, the $170k salary across all 4 quarters in form 2210 because that is what my reasonable salary should have been. Whereas I would amortized only the $70k across the 4 quarters and plopped the $100k bonus in the 4th quarter because that is when it was paid out.
When I look at my P&L every month or every quarter and the numbers are positive, we are making money, it is my preference to keep those funds there in the cash account in case of unexpected need for capital expenses, need to procure inventory, or as a cushion in case the stuff hits the fan. If I was too take a larger salary or bonus prematurely and suddenly sales ran flat, we had a major need for cash I, then I would find myself taking out a loan to make things meet.
So, is my preference in taking a smaller than reasonable salary during fiscal year and paying out a bonus to make things more reasonable salary wise the last month of the year, and reporting that income as it was accurately earned in the respective form 2210 periods acceptable?