An S-Corporation is a domestic corporation that is exempt from federal income tax.
Example 1: S-Corporations
Consider personal return of client from S-Corporation from their tax return.
- For S-Corporations, you would determine with the client if they are the sole owner or if they are one of many shareholders.
- Determine if the client pays themselves a salary from the business.
- Determine if the client receives profit sharing; which is a distribution from the business. (this would be coded as unearned income)
- If the client receives a salary from the business, you would review W-2, Wage and Tax Statement. Line 1 displays the household member’s annual wages for the tax year. Divide amount by 12, or number of months the S-Corporation existed to calculate monthly amount.
- If the client received profit sharing income, review Schedule K-1, Shareholder’s Share of Income. Line 1 will display ‘ordinary business income’. Divide amount by 12, or number of months the S-Corporation existed to calculate monthly amount.
Randy Smith, during his interview for SNAP benefits, states that he is the sole owner of an S-Corporation from which he pays himself a salary. He provided his tax forms from last year and declares that the income is representative. He has owned the S-Corporation for the last 4 years. He declares that he did not receive any profit sharing / distributions in the last year.
From this example, Randy’s W-2 states that his annual wages were $24,012. His monthly income, $2001, is coded in earned income tab.
- Q1. A client and his spouse are the sole owners of an S-Corporation. They have provided their business and personal income tax returns. Is it correct to accept the personal income tax return and not consider the corporation’s return and use it to determine income?
- A1. An S-Corp shareholder includes their share of the corporation’s income, deductions, etc. on their tax return. If they pay themselves a salary, you would need to have a copy of their W-2. You will also need to have a copy of their business return to verify that the clients are an S-Corp and also to determine if they received profit sharing.
- Q2. I have an individual who is the sole owner of an S-Corp and also pays himself a salary from the company. The K-1 information should show up on the personal return, but should we still obtain both the individual and corporate tax return.
- A2. If the individual pays himself a salary, you would review their W-2, Wage and Tax Statement to determine their self-employment income. You would also review K-1 to determine if they received profit sharing.