Are S Corp Distributions Considered Income?
According to the Internal Revenue Service, S corporation distributions to shareholders are reported on their personal tax returns and taxed at their individual income tax rates. You report S corp distributions in the Income section of Form 1040 on the line "Rental real estate, royalties, partnerships, S corporations, trusts, etc."
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Tax Treatment
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S corporations pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes. The corporation does not pay federal tax. Distributions paid to shareholders are subject to income tax only. The distributions are not subject to FICA (Social Security and Medicare) tax and are not considered self-employment income subject to self-employment tax.
Distributions vs. Wages
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If an S corp shareholder also performs work for the corporation, the IRS requires that the corporation pay the person a salary and withhold all the required taxes. The salary must represent a fair-market wage for the services performed. The person can receive both a salary and shareholder distributions.
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Considerations
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According to the IRS, if the S corporation pays the health and accident insurance premiums for an S corporation shareholder-employee who owns more than 2 percent of the corporation, the S corporation can deduct the premiums as fringe benefits. The S corp must also report the premiums as wages for income tax withholding purposes on the shareholder-employee's Form W-2. However, the premium amount is not subject to FICA or unemployment taxes.
Electing S Corp Status
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Many small businesses elect S corp status because it's less complicated with fewer requirements than being a traditional C corporation. After you form your corporation, you must submit a Form 2553, Election by a Small Business Corporation, signed by all the shareholders, to the IRS.
S Corp Qualification
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The IRS requirements to qualify for S corporation status include being a domestic corporation, having no more than 100 shareholders and having only one class of stock. The corporation also must have only allowable shareholders, which includes individuals, certain trusts and estates and excludes partnerships, corporations or nonresident alien shareholders. Some corporations are ineligible for S corp status, including certain financial institutions, insurance companies and domestic international sales corporations.
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