I own 100, 50, & 49% of the 3 s-corps. My decree has a baseline income for support with Smith-Ostler for additional income. Mediation Lawyer, review lawyer, & forensic accountant (CDFA) all said this was normal & I gave up my argument on pass-through income. I am willing to pay CS & SS on money I receive. 2012 income received was 84% of baseline value, my 1040 agi was 2.3X the baseline. Received income includes a 20% distribution of income from 100% owned corp. Now my ex is wanting SO based on my AGI. I do not have cash for this & to continue business. My options 1) Pay SS & CS and close corps do to lack of cash, or 2) be in arrears & continue business. Neither are acceptable. This should be common problem with other business owners but no one seams to be able to answer.
One of the benefits of creating an S-corporation is the ability to "avoid" not "evade" self-employment income on s-corporation earnings that pass through to the shareholders of the company. However, it is EXTREMELY important that an employee shareholder of the corporation receive a reasonable salary that at least covers his or her every day expenses. An employee shareholder cannot receive zero income and $100,000 in distribution income and survive an audit, as the IRS will reclassify the income to salary and the shareholder will be penalized.
Therefore, the general answer is that K-1 distributions from an S-corporation are generally not subject to self-employment taxes. You should consult with a CPA or a good tax attorney in your location to obtain more detailed information based on your specific factual situation
Disclaimer: This answer is designed for general information only. The information presented above should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.
It seems that the baseline income from which the Basic SS and CS is derived should first be taken into account and subtracted from the total AGI income to determine the additional SO income. If there is additional income after deducting the baseline income from tacAGI then the OS formula would determine the additional support if any. If the SO is derived from the AGI with no deduction for baseline income then it seems there would be double dipping going on. You should review this with your attorney.