<p>For people familiar with subchapter s corporations…</p>
<p>let’s say you have a subchaper s corporation that makes 100,000…</p>
<p>that income has to flow to the owner of the subchapter s, correct?</p>
<p>so the owner of the subchapter s ends up paying the tax from his own 1040, correct?</p>
<p>Correct. Usually the income flows through in two ways. The first is the salary paid. This is reported on a W-2 to the owner. The second is the profit made by the S-Corp. This is reported on a K-1.</p>
<p>DH and I have an S Corp set up for our business. You can take some money out as salary (subject to Social Security), and some money as “owners’ draws” (not subject to Social Security). You would want to speak to an accountant as to the ratio of salary/draw.</p>
<p>Interestingly, we have to pay state and federal unemployment taxes, even though we are not eligible to collect unemployment! We don’t have to pay for workman’s comp, at least, since the two of us are the only employees.</p>
<p>Yes OP, you are correct.</p>
<p>Hmmmm…ok thanks everybody…</p>
<p>An S corp files its own return and sends a report called a K-1 to each owner (if there’s more than one). The k-1 apportions income among the owners, each of whom then pays the taxes on that income on their own personal returns. The S corp itself must account for its income and expenses, just like any other business. Having an S corp for a sole-owner business has advantages in terms of what can be written off to the business and thus paid for with pre-tax dollars rather than after-tax dollars. However, with those advantages comes additional scrutiny.</p>
<p>The biggest advantage for a corporation (C or S) over a sole proprietorship is the limited liability. I’m not sure what expenses can be written off on a S or C corp return that could not also be written off on a Schedule C (sole prop). The audit rate on individual returns is higher than on corporate returns.</p>
<p>Sub S income flows through on a Form K1 to the owners, whether or not there is one owner or more, pro-rata with their % of ownership. The Internal Revenue Code requires a “reasonable” salary be paid for compensation and tax-free dividends may be distributed in addition to that.</p>
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Ooohhhh! Is that the difference? For years I’ve been asking H why his draw comes separately from the paycheck. All he ever says is, “I dunno. It’s just what the accountant tells me to do.” Now I understand. Thank you, ML. :)</p>
<p>.:scurries off to school the husband:.</p>