Sid: Your installment requirements to avoid a penalty for
underpayment of quarterly taxes are to have paid 1/4 of 110%
of last year's tax each quarter, or 1/4 of 90% of your
current year's 1040 tax each quarter (or within $1000 of it
if you only use Withholding). If you want to do the 2210 AI
it has to include the profit earned in the S-corp as of the
"quarter" dates of Mar 31, May 31, Aug 31 and Dec 31. Since
your 2005 1040 did not include any profit from the S since
it's closing in September, (heck, why else would you have a
September fiscal year?) that means your first quarter AI
for 2006 will have to include the S corp profit from Sept 31
through March 31, 2006 (that's 6 months of net profit
without deducting your next September salary payment).
Presuming relatively flat earnings for 2005-2006 (versus
lower 2004) putting that much income into the first quarter
of AI will create a deposit requirement considerable more
than 1/4 of 110% of 2005's tax.

In other words, I don't think you want to depend on the AI
to reduce your penalty. If you're not cnvinced you can try
it yourselt on our 2210 AI Excell calculator at
www.edcosoft.com/qitc.html.

You mention that increasing your salary so 100% of it will
be withheld to apply evenly throughout the year will cost
you in SE tax, I agree. Personally I believe everyone should
max out their SE wages (at about $90K)(because I'm retired
and draw SS), but maybe the advice about the IRS attitude
discussed in the other posts will influlence you to put it
even higher. Anyway, your withhholding is not limited to
100% of your salary. You can "withhold" any amount you want
(and send to the IRS on your 941) as you pay your salary,
charging the overage to your draw (hope you know what "draw"
is, versus salary and profit distributed on a K-1).

You will have to personally weigh the difference of 15.5% SE
taxes against the simple interest of 8% penalty for
installment underpayments when you set your salary. In
other words, if you make an installment payment this
September because you can't withhold enough (yes you can.
see above) it will stop interest acuulating on any
underpayments at a simple interest rate of 8%. If you are
growing fast you may prefer to pay the 8% next April versus
the required installment now, in order to preserve (or not
deplete or overspend) your working capital.

I hope this helps you.

ed

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Sid wrote:

- quote -

only S-Corps that were formerly C-Corps can have dividends.
I suggest you seek the help of an EA or tax accountant.

<< ================================================== ===== > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

<Not crossposted
I am a small business owner that operates an S-Corp
(September year-end). I have few personal expenses and so
for the sake of simplicity in my 941-filing, I take a salary
once a year in September at the end of the company fiscal
year. I take a modest salary and the rest as a dividend
since I am the single shareholder. For the past several
years, I have adjusted my withholding in my single paycheck
to reflect the taxes I believe I will owe that year.

During this last year and this current year, the company has
experienced healthy profits and thus more income flows
through to me. I keep my modest salary the same, but my
dividend is fairly large. Last year, I simply withheld 100%
of the previous year's federal taxes and did not have to pay
any underpayment penalty for 2005. However, this year I can
see that I will not have a sufficient paycheck in September
to withhold 110% of the 2005 taxes.

I see two options available to me to fully avoid an
underpayment penalty:

1) Increase my September paycheck to adequately cover the
necessary withholding (110% of 2005 taxes) - I understand
that the IRS sees the federal income tax as having been
equally withheld throughout the year - but I'm not too crazy
about this idea as it merely gives more away in social
security and medicare taxes.

2) Use the annualized income installment method, 2006 Form
2210, Schedule AI and show the large dividend as received on
September 30 - do I then need to make a personal 1040-ES
payment on September 15 or December 31? The company fiscal
year closes September 30 and the corporate taxes are not
filed until December 15 - is this dividend a 3rd quarter
dividend or a 4th quarter dividend?

Is option #2 the way to go? Am I making my life more
difficult by having to complete Form 2210 - Schedule AI? Are
there other pitfalls to be aware of?

If I pursue option #2, what amount should I withhold from my
paycheck - just the amount required for the amount of my
modest salary?

Thanks
Sid

<< ================================================== ===== > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >