USA S-Corp Tax 2019 Questions


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Greatly appreciate any help with these 2 questions.

So 2019 was my first year of business in NYC, I elected treatment as an S-corp. I made 70K a year with a client. I understand i have to pay myself reasonable wages, I took a 10k distribution and 10k of wages which is included in my overall expenses of 46k. The remainder amount is 24k and that's retain earnings kept to be reinvested in the business. I also understand i have to pay FUTA on the corporate level and Medicare and SS taxes for myself

1,) What are the likely hood given its my first year that reporting those numbers will be an issue or raise any red flags?
2.) What type of tax and percentage if any would I be looking to pay on the retain earnings?

Thank you!
 
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The thing that will possible raise a red flag with the IRS is the amount you paid yourself as reasonable compensation. There are several factors the IRS looks at in determining if someone is truly paying themselves a reasonable salary. The 10K you paid yourself on a 70K income seems somewhat low to me. One of the major problems people operating s corporations seem to have is understanding the accounting that goes along with it. it is of the utmost important that you track your basis and what is known as an accumulated adjustment account. Your basis is what you personally invest into the s-corp; such as cash, property, and equipment. Your accumulated adjustment account is the profits in your company from its operations over time. Any cash distribution will affect this account and your basis. You will pay payroll taxes on your reasonable salary, because these are w-2 wages. Your profit will be taxed whether you distribute it to yourself or not. So you will pay Federal tax on the 24K, but it will avoid one half of the self-employment tax. This is the benefit of the S corporation. The tax on the 24K will be dependent upon your basis. If it is more than your basis, you will pay an additional capital gains tax. I hope this helps you out. If it is less than your basis, there is no additional tax because you have already paid the Federal taxes on it. I hope this helps you out. Leslie (e-mail address removed)
 

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