Question

S-Corp and Social Security Max Earnings

Forum|Forum|6 years ago
November 30, 2019
1 reply
0 views

I'm eligible to start claiming social security this May at 62. I do some side stuff - uber, etc and know that I can earn up to $17,640/year and still be eligible for my full check. I've done the full analysis about trade-offs in waiting until full retirement age to start collecting and understand all of that. I was laid off from my corporate job last year and unable to find anything else, so I do these side hustles.

Question is, I also have a year-old S-Corp (counseling services) that right now pretty much breaks even between expenses and income, a few hundred dollars a month. I hope to become profitable by mid-2020 to the tune of about $2k/month profit.

How does that affect my SS benefit? Does it matter if I leave the money in retained earnings in the S-Corp? If I do take some, should it be via 'draws' or salary? I think I have to file a K-1 anyway, so a bit confused.

Thanks for any help. Hopefully I posted this in the right area!

A

Anonymous_

I suggest you seek in-person guidance from a tax professional who is well-versed in a scenario such as the one you delineated.

Having written that, you must pay reasonable compensation to yourself as a shareholder-employee in return for your services to the corporation.

See https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues#Reasonable%20Compensation

Consequently, a large percentage of your S corporation's profit will be returned to you in the form of a salary for your services (reported on a W-2 since you are an employee of the corporation). The balance of the profit will be reported to you on the K-1 that you will receive as the sole shareholder and, in turn, that figure will be reported on your individual income tax return as ordinary income (but not subject to self-employment tax).

In sum, with $24,000 in annual profit, you could probably get away with reporting circa $17,000 in salary and $7,000 in non-salary/wage, taxable, distributions. Regardless, considering the nature of this issue, you would be well-advised to consult with an experienced tax professional.

[Note that, as sole shareholder, your S corporation net profit is taxable to you irrespective of whether it is distributed to you or retained by the corporation]