Can an S Corp have a deferred compensation plan?

In S corporations or unincorporated entities (partnerships or proprietorships), business owners generally can’t defer taxes on their shares of business income. However, S corporations and unincorporated businesses can adopt NQDC plans for regular employees who have no ownership in the business.

Do S corporation distributions have to be pro rata?

The distribution is based on the percentage of stock that each shareholder holds in the corporation. Because S-Corporations may only issue one kind of stock the distribution of the earnings to shareholders should always be proportionate to their holdings in the corporation.

Is a deferred compensation plan a good idea?

A deferred comp plan is most beneficial when you’re able to reduce both your present and future tax rates by deferring your income. Unfortunately, it’s challenging to project future tax rates. This takes analysis, projections, and assumptions.

Can an S Corp have a Keogh plan?

Many options for retirement planning are available to the self-employed, such as profit-sharing plans, simplified employee pensions (SEPs), Keoghs, SIMPLE IRAs, and solo 401(k)s.

How is deferred compensation treated for tax purposes?

How deferred compensation is taxed. Generally speaking, the tax treatment of deferred compensation is simple: Employees pay taxes on the money when they receive it, not necessarily when they earn it. For example, say your employer provides you $80,000 a year in salary and $20,000 a year in deferred compensation.

How does a deferred compensation plan work?

A deferred compensation plan withholds a portion of an employee’s pay until a specified date, usually retirement. The lump sum owed to an employee in this type of plan is paid out on that date. Examples of deferred compensation plans include pensions, 401(k) retirement plans, and employee stock options.

How do distributions work in an S Corp?

S corporations, in general, do not make dividend distributions. They do make tax-free non-dividend distributions unless the distribution exceeds the shareholder’s stock basis. If this happens, the excess amount of the distribution is taxable as a long-term capital gain.

How are NQDC distributions taxed?

Distributions from nonqualified deferred compensation plans are normally considered to be “supplemental wages” for income tax withholding purposes. Federal tax withholding rules require that taxes on supplemental wages are withheld at a flat rate of 25 percent.

Can S Corps issue options?

Yes, an S-corporation can issue stock options just like a C-corporation. Consider some of these planning ideas when managing a stock option plan for an S-corporation: Do not grant options to persons who are not U.S. residents or who can become non-residents in the future.

Can an S corporation gift stock to employee?

Giving Stock to Employees Outright or Selling It to Them at a Discount. To the IRS, there is no such thing as a “gift” between an employer and an employee.

Can S corp owners take unequal distributions?

As to the question of whether a S-Corporation can make distributions to select shareholders that are disproportionate to the shareholders ownership interest, the simple answer is that it is not allowed.

Do all S corp shareholders have to take a salary?

The IRS requires that all S corp owners, also known as shareholders, who are actively involved in running the business receive a W-2 salary. As the business owner, you are still entitled to draw money from the business in the form of a shareholder distribution.