S-corp dividend treatment?

I'm considering leaving my salary job to become a consultant/contractor. One option is forming an S corp vs being a sole proprietor. It seems that ESP properly handles the SS tax part of a sole proprietorship, but what are the ramifications of doing business as an S corp?

If the S corp were to have ~$165K in revenue there would be enough money to pay me 122K salary, contribute $30.5 K (25% of salary) to my 401K and pay 7.65% employer payroll tax. Should I record that 122K as standard SS-covered salary, and the $30K as employer contribution to retirement accounts?

In the unlikely event corporate revenue exceeded $165K, it could be paid to me as a dividend reported on form K1. No payroll tax would be due on that distribution. Should that dividend be recorded in ESP as a special receipt taxable as ordinary income?

Thanks for your time.


dan royer's picture

I'm not sure Chris. I'll see if Mike can help.


I don't know how S Corps are taxed, but I think you are right on how to model your personal situation.
Entering $122k as gross employee wages and copying them to future covered SS earnings will properly account for income and employee FICA taxes. $30.5k employer contribution to your retirement account is correct.
I think a special receipt, taxable as ordinary income, properly handles the K1 dividend.

The taxes on the S Corp are a separate issue.

Thanks. That clarifies the distinction from sole proprietorship in how ESP handles the income and taxes.

S Corps are pass-through. As long as you pay yourself a reasonable salary, remaining corporate net profit (after salary and employer SS taxes) can be paid out as a dividend and the corporation itself is not taxed. The difference between a S corp and sole proprietor seems to be that S corp excess revenue paid as dividends is passive income and not subject to SS taxes.

The corporation can contribute up to $30,500 to a 401k (in 2018), assuming I withhold $24K from my salary, but the employer contribution cannot exceed 25% of salary. The sweet spot is $122K salary, which is a good salary for my position in my industry.

To pay $122K + $30.5K + SS employer taxes requires gross revenue of ~$165K. It's unlikely I'll exceed (or even get to) $165K. It's plausible but I'm not willing to work that hard.

Beginning in 2018 S-corp K1 income gets a 20% deduction up to certain income limits ($157,500 for consultants filing single) before being subject to individual taxes rates. I don't see any way to handle that under Special Receipts. Any suggestions?

Enter separate special receipts? 20% as non-taxable and the other 80% as ordinary income? That's just a WAG.