corporation payout rules
For an S corporation with only two shareholders,
are both required to have income reported on their K-1s? Is it permissible
for just one to have income and dividends? Is the shareholder's
income subject to self-employment taxes, and if so, is Schedule
C used? -- Laura
An S corporation is a corporation where the shareholders have elected
(using Internal Revenue Service Form
2553) to pay the tax on the income of the corporation in lieu
of the corporation paying income taxes.
The shareholders pay the tax by including their distributive
share of income on their individual income tax returns. A Schedule
K-1 is provided to each shareholder by the S corporation to
inform them of the appropriate amounts of income and deductions
to include on their income tax returns.
Only one class of stock can exist in an S corporation.
Since the distributive share of income, deductions and dividends
are paid in proportion to stock holdings and only one class of stock
can exist, each shareholder's distributive share has to be reported
in accordance with their ownership percentage. So it is not OK that
only one shareholder has income and dividends. In fact, if dividends
are not paid in accordance with stock ownership, the IRS can claim
that the S corporation has more than one class of stock and thus
the S election may be jeopardized.
A shareholder's distributive share of income and dividends
are not subject to self-employment tax. The working shareholders
of the company are considered employees and the company should file
and pay payroll taxes on their salaries.
An individual shareholder's share of income is reported
on page 2 of Schedule
E and other appropriate forms as indicated on Schedule K-1.