<P> Quarterly estimated taxes must be paid by the individual to avoid tax penalties, even if this income is "phantom income". </P> <P> Widgets Inc, an S - Corp, makes $10,000,000 in net income (before payroll) in 2006 and is owned 51% by Bob and 49% by John . Keeping it simple, Bob and John both draw salaries of $94,200 (which is the Social Security Wage Base for 2006, after which no further Social Security tax is owed). </P> <P> Employee salaries are subject to FICA tax (Social Security & Medicare tax)--currently 15.3 percent--(6.2% Social Security paid by the employee; 6.2% Social Security paid by the employer; 1.45% employee medicare and 1.45% employer medicare). The distribution of the additional profits from the S corporation will be done without any further FICA tax liability . </P> <P> If for some reason, Bob (as the majority owner) were to decide not to distribute the money, both Bob and John would still owe taxes on their pro-rata allocation of business income, even though neither received any cash distribution . To avoid this "phantom income" scenario, S corporations commonly use shareholder agreements that stipulate at least enough distribution must be made for shareholders to pay the taxes on their distributive shares . </P>

Can a subchapter s corporation have a subsidiary