S-Corp Shareholder Distributions

tristpt

What is the proper way to categorize shareholder distributions within Wave Apps? I noticed there is Business Owner Contributions and Drawings but it states that is for money added to the business (not taken from). It seems like the "Drawings" would be the distributions.

I've tested an account under that but also retained earnings and I've noticed that the profit/loss statement for the business doesn't subtract the distributions. Is this correct? I figured the business would show close to a $0 profit since I transfer all the excess funds to the single owner, but it doesn't appear Wave Apps does this.

Mikeg

@tristpt,
The correct place is the equity section of the balance sheet. You can either use owner draw or create an account "Distributions" in the same equity section. Think of distributions as a return of equity in the business or a distribution of profits. Distributions to owners are not an expense and therefore, would not be shown on the income statement.
Hope that helps!

Featherbone_Co1

Now that I know how to categorize a distribution to a shareholder, how do I actually make the distribution? I am a the sole shareholder in my company and also the sole employee. The company pays me via direct deposit. How can I set up a payment to the same bank account, but in a different category other than payroll?

Mikeg

@Featherbone_Co1,
You would either write yourself a check or if you have the ability to electronically transfer the funds from the business to your personal. Categorize the disbursement as a Distribution.

Featherbone_Co1

Seems so obvious now... thanks!

Chris42

In addition to this—how or where do I take care of the tax implications of the distribution? I’m an S-Corp owner, so I guess I should report it on my personal taxes. Is this something I will take care of in TurboTax once I get to my annual tax return?

Mikeg

@Chris42,
S-Corp distributions are not normally taxable. You will enter the K-1 line items into your personal return. Because you received a distribution, the IRS now requires basis schedules be attached.
FYI: Distributions are not usually taxable because the cash being distributed is profits of the S-Corp which will be or have been taxed. S-Corps flow their income to shareholders.

Chris42

@Mikeg,

Thank you very much for your prompt help! Sorry for the newbie questions but I just want to make sure that I got everything right:

1. The salary that I’m paying myself through payroll will already have been taxed, so I won’t have to worry about it until my tax return.
2. However, the distributions I pay myself will be subject to quarterly estimated taxes - I assume I have to pay estimated taxes to the IRS on a quarterly schedule? Is this the 15.3% tax (in CA)? Do I have to file anything, or just do the maths and send the estimated amount to the IRS?
3. The K-1 is a form outlining distributions and their tax implications on my person, that I assume, Wave would file on the company’s behalf when the time comes? Which would then trickle into TurboTax and my personal tax return?

Mikeg

@Chris42,
1. So long as your withholdings are appropriate, then yes
2. Distributions in of them themselves are not taxable. However, they represent profit that is passed to the shareholder on Form K-1. For example, S-Corp earns 10000 in year one but retains the cash. The shareholder would have paid tax in year one on the 10k. In year 2 the S-Corp distributes 2k in cash. There is no tax associated with the distribution. The earnings from an S-Corp are not subject to self employment tax (i.e. 15.3%)
3. The K-1 is used by the shareholder to report their share of S-Corp activity. The S-Corp does not pay any federal taxes. There is a tax in CA though. I think it's 1.2% or so.

Chris42

@Mikeg, thank you so much, your explanation is super clear & very helpful.