Great question! I went through this exact confusion last year. Your $67.5k distributions should definitely NOT go on line 7 of Form 1120S - that's only for officer compensation (your $60k salary). Here's the correct treatment: - Line 7 (Form 1120S): Your $60k salary as officer compensation - Schedule K-1, Box 16 Code D: Your $67.5k distributions The key thing to remember is that distributions aren't a deductible business expense - they're just you taking out profits that have already been taxed at the corporate level. TaxAct should handle this correctly if you categorize them as "shareholder distributions" in the software. One tip: make sure your books show these distributions coming out of retained earnings or current year profits, not as an expense account. This will help everything flow correctly through the tax software and avoid any confusion during filing.

Just to add another perspective - I've been running my S-Corp for 6 years now and this distributions vs. salary classification is one of the most common mistakes I see new S-Corp owners make. You're absolutely right to double-check this! Your setup sounds very similar to mine. The $60k salary goes on line 7 as officer compensation (and should match your W-2), while the $67.5k distributions only appear on your K-1 in Box 16, Code D. One thing that helped me understand this better: think of distributions as withdrawing money you've already earned and will pay personal income tax on (via the K-1), while salary is a business expense that reduces the S-Corp's taxable income. That's why distributions can't be deducted on the 1120S - they're not an expense, just a withdrawal of profits. Your salary-to-distribution ratio looks reasonable for IRS purposes too. Keep good records of when you took each distribution throughout the year - it helps if you ever get questioned about the timing or amounts.

Can someone explain why this even matters? If it's your S-Corp and all the money flows to you either way, why does the IRS care how you classify it?

The reasonable compensation analysis for your situation is complex, but I'd strongly recommend documenting your decision process thoroughly. As others have mentioned, $168,600 is almost certainly too low for a $5M law practice. One approach I've seen work well is to break down your compensation into components: (1) what you'd pay an attorney with your experience to handle the legal work, (2) what you'd pay someone to manage a business of this size, and (3) any premium for specialized expertise or client relationships you bring. You might also consider a gradual approach - if you've been taking minimal salary historically, the IRS may be more understanding of a phased increase to reasonable levels over 2-3 years rather than a sudden jump. This shows good faith effort to comply while managing cash flow. Whatever number you settle on, make sure you can justify it with market data and keep detailed records. The IRS burden is to prove compensation is unreasonable, but you want to make their job as difficult as possible with solid documentation.

I actually work with several family businesses and one thing to consider is the liability protection aspect. With an S corp, you get clear separation between personal and business liabilities. With an LLC, the protection is there but sometimes less clearly defined depending on your state. For a family management company, where you're potentially dealing with significant family assets, this liability distinction could be important.

One factor that hasn't been discussed much is the administrative complexity with 5 family members. With an S corp, you're limited to one class of stock, which can make it challenging if family members want different profit-sharing arrangements or voting rights. An LLC gives you much more flexibility to customize ownership percentages, profit distributions, and management roles through your operating agreement. Given your $875K annual income and varying participation levels, you might want to consider an LLC with different membership classes - some members could be managing members (actively involved) while others are passive investors. This flexibility could be worth more than the potential self-employment tax savings from an S corp structure, especially since you can always elect S corp taxation for the LLC later if your situation changes. The key is making sure your operating agreement clearly defines each member's role and compensation to avoid any IRS scrutiny about whether payments are legitimate business expenses.

Has anyone else noticed that the IRS sends the IP PIN letters in a surprisingly plain envelope? Last year I almost threw mine away because it looked like junk mail. It wasn't clearly marked as being from the IRS on the outside - just had a return address from Kansas City that I didn't recognize at first glance.

This is such a helpful thread! I'm in the exact same situation - waiting for my 2023 IP PIN after getting my first one last year. The timing advice here is really useful. I had no idea they come in such plain envelopes - I'll definitely be extra careful checking my mail in December/January. One question for those who've been through this before: if I end up needing to use the online Get An IP PIN tool, do I need any specific documents to verify my identity? I want to make sure I have everything ready just in case the letter gets lost in the mail chaos. Also, does anyone know if there's a deadline for when you have to retrieve your PIN online, or is it available throughout the entire filing season? Thanks everyone for sharing your experiences - this community is so much more helpful than trying to navigate the IRS website alone!

One more tip about the mail - make sure to send it CERTIFIED with return receipt! I made the mistake of just regular mailing my late return last year, and the IRS claimed they never received it. Had to send everything again and lost another month. The receipt gives you proof of the postmark date which is crucial if there's ever a dispute about when you filed.

Just wanted to add that if you're calculating your own penalties and interest, make sure you're using the correct rates for each period. The failure-to-file penalty is 5% per month (or part of a month) up to 25% of unpaid tax, and failure-to-pay is 0.5% per month. But interest rates change quarterly - for 2024 it was 8% annually for most of the year, but it dropped to 7% in Q4. Also, if both failure-to-file and failure-to-pay penalties apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay penalty for that month (so you're not double-penalized). The IRS Publication 17 has all the current rates and calculation methods if you want to double-check your math. Given that you're already 2+ months late past the October extension deadline, paying the full estimated amount now is definitely the right call to stop the bleeding on interest charges!