I started an S-Corp in July this year in Illinois. I am the only Shareholder. My company has income from July. I did not take any distributions or salary to myself till now.

Please answer the following questions

1. Is it obligatory to take salary or can I take distributions at year end?
2. I have a federal EIN and state EIN. Can I start taking salary from this month? If yes, what all taxes the company has to pay and what all taxes the company has to withhold from my pay check?
3. What all things are required to start paying salary to myself?
4. My company did not pay any estimated taxes till now. Does the company need to pay any estimated tax?
5. I would like to reduce taxes by starting a retirement plan. Can you suggest which one would be better and how much can I save?
6. I will be taking vacation early next year. Can I carry-over any income from this year without paying any tax, so that I can take salary when I go on vacation next year?
7. What are all the tax papers does my company need to file and when?

Thanks in advance,
Small Business Owner

1). A shareholder is an employee and should take a reasonable salary. If your business needs the money and can't pay a salary you do not have to take a salary. You may take cash distributions of profits at any time, however, if you have not taken a salary the question arises as why can you take a cash distribution if you can't afford to take a salary. If you are talking about a small dollar amount take the cash distribution because you need the profit paid-out to pay the 1040-tax on the profit and forget about the salary.

2). You may take salary at any time calculated in any way so long as it is reasonable. Withholding taxes may be determined from tables in IRS publication 15. http://www.irs.gov/pub/irs-pdf/p15.pdf

3). Read the IRS pub 15.

4). An S-corp does not pay federal estimated income tax as the profit is taxed on your 1040. You should use form 1040ES to pay personal estimated income taxes.

5). The simpliest and probably the best is the SEP-IRA which is calculated on a percent of your profit. http://www.irs.gov/pub/irs-pdf/p560.pdf

6) All S-corp profit every year is taxed on the shareholders 1040 regardless of how much money is taken out of the corp. So, no all profit is taxed, however, when you take a salary is up to you and the S-corp gets a deduction from profit in the year that you take the cash. You of course get a W2 and have the income when you take the cash from salary.

7). Federal payroll taxes withheld are reported to the IRS on form 941, usually quarterly but may be monthly if large payroll (see pub 15). Payment of payroll taxes are usually paid to the gov through your bank with a payment coupon. State payroll tax withholding is reported on IL-941. You will also have a quarterly state unemployment tax and an annual Federal 940ez tax. The S-corp is required to anually file a Federal 1120s tax return and a state IL-1120 or IL-1120-ST.

my 2???

I absolutely HATE dealing with state and federal payroll taxes. And the whole payment coupon thing is a pain in the butt. Instead, you should try one of the many online payroll services that take care of filing and paying all these taxes for you electronically. Some of the smaller firms have some very good rates for small businesses, and much better customer service than big old services that just seem to care about large accounts. Talk to one of their representatives--do they seem truly nice and care about your business and taking care of you? Or are they just focused on getting the sale? Or do they not seem to care at all? You will find all types, so be sure do your research.