<p>My husband and I own our own business. He receives a salary thru a W-2 and the profit of the business appears in our AGI. We also get a shareholders distrubution each year from the company that doesn't appear on our 1040. Does this have to be reported an untaxed income?</p>
<p>Why doesn’t it appear on your 1040? The salary would be earned income and would be treated as such with FICA taxes etc. The shareholder’s distribution is not earned income, but it is income and I’m pretty sure it should be reported on schedule E of your tax return.</p>
<p>I believe shareholder distributions are included in the shareholders taxable income; however, the distributions are not subject to FICA and are not considered self-employment income subject to self-employment tax and is reported on Schedule E so I would imagine if treated correctly on the tax form on the correct line the FAFSA would treat it correctly. i’ve only had to deal with shareholder distribution with a family relative who did not have college age kids so not versed in how it surfaces (or doesn’t surface on the FAFSA). OP look at your schedule E and perhaps you can spot the shareholder distribution otherwise talk to your accountant.</p>
<p>Like the others, I’m surprised the distributions don’t appear on your 1040. Shareholder distributions are typically reported as Schedule E income and appear on line 17 of the 1040 tax form, which is added to your W-2 income to compute your AGI.</p>
<p>OP, the answer is ‘no’ because this income has already been taxed (i.e. it is NOT untaxed income).</p>
<p>Distributions received by an S Corporation shareholder are not shown on Form 1040 as they have already been included in taxable income on Schedule E in either the current year or a prior year.</p>
<p>Some of you appear to be confusing ‘distributions’ with income.</p>
<p>Year 1, S Corporation XYZ (100% owned by its shareholder) had $20,000 of profit (Line 1 Ordinary Income from Schedule K-1) but zero distributions (none of the profit was distributed out to the shareholder, it all remained in the S Corporation’s bank account). The Form 1040/Schedule E shows $20,000 of ordinary income.</p>
<p>Year 2, S Corporation XYZ had $5,000 of profit and the shareholder took $25,000 of distributions. The Form 1040/Schedule E shows $5,000 of ordinary income. Period. This is because the $25,000 of distributions includes the $20,000 already reported as income in Year 1. If the shareholder were to also report and pay tax on the $25,000 distribution, he’d be paying tax on it twice!</p>
<p>Here’s another way to think about it: let’s say you are an employee who receives a W-2 each year and you have your pay checks direct-deposited into your checking account. When you take a ‘distribution’ from your checking account (i.e. you withdraw some of the money), would it make sense for you to report these ‘distributions’ on your tax return and pay tax on them (again!)?</p>
<p>I spoke with my accountant yesterday and he basically explained what Madison85 said. He explained that the distribution had already been taxed in previous years and that I would only list the income that I am being taxed on for the that year. He said that the shareholders distribution is not income.</p>