S-corp taxing on non pay

[Arch]

In the process of incorporating an S-corp and had a question about taxes. I have a CPA but I was browsing through the forums on this site and found quite a few good posts/discussions so thought I will post here.

Assume my S-corp makes $100K a year and I pay myself a salary of $60K. That leaves $40k that I can use for everything else, including paying for the corporation expenses distributions and if I am not mistaken, paying the employer contributions for the employee FICA taxes.

The employee pay will be subject to all the taxes: Federal, State, City, FICA ($3,390 @ 5.65%).

I understand that as an s-corp/employer I am supposed to pay the employer contributions for the FICA. ($4,590 @ 7.65%)

My lack of knowledge concentrates around the $40K. How does that get taxed?

So out of the $40K, I pay the employer FICA, pay for any s-corp expenses (lets assume about $10K a year) : $40,000 - $14,590 = $25,410

I take the $25,410 as distributions and those get taxed Federal, State, City, FUTA?
OR do I pay taxes on the full $40K?

- Thanks

[ArcSine]

The corp will give you a W-2 for the 60K piece, and you'll thus report that on your personal return on the line for W-2 earnings.

The 40K piece, or what's left of it after paying deductible business expenses, will be reported to you on a K-1 by the corp. Sticking with your example, let's suppose that the full 14,590 is deductible. Then the corporation will give you a K-1 showing 25,410 as income, which you'll then report on your personal return on Schedule E, and then on page 1.

The 25,410 will be subject only to fed and state income tax, but not payroll tax nor unemployment taxes. Also, it'll be reportable on your personal return whether you physically withdraw it from the company's cigar box or not. The flip side of that coin is that when you do get around to distributing the 25,410 to yourself, whether in the same year or at some later time, it won't generally be taxable income, since you reported it already (and paid the income tax on it) via the K-1 → 1040 process I described above.

You'll certainly want your CPA's input with the various wrinkles and exceptions which can crop up (don't they always?) but the foregoing is the big picture from 30,000 feet.

[Arch]

OK, that clears things up.

So the 'Employer's FICA contribution' is considered as a deductible expense?
Are the FUTA and Employee disability and life insurance deductible as well?

Thanks - I appreciate the help. Really just getting the 30,000 feet view here!

[ArcSine]

An employer (your corporation) can deduct for tax purposes the employer's share of the FICA, as well as unemployment tax.

Life insurance is not a deductible expenditure, and I'm kinda sorta sure the same goes for disability insurance. But the details on how they should be handled (W-2 gross up, or nondeductible distribution, say) should come from your friendly neighborhood CPA. There may some options as to how to handle those items, and he'll have the insider's view on the best approach.

[Evan]

Life insurance and disability insurance are generally not deductible... Though that's not to say the corporation can't pay these premiums, it just won't be a deductible business expense. Though there are "ways" of reporting it, either as income to you from the W-2, or as a distribution/dividend.

[Arch]

Thanks guys I have a clear picture on the taxes. The life and disability is something I will followup with my friendly neighborhood' CPA!