California PTE or Bonus payment to Shareholder - an illustration

In  your bonus example, the S Corp still has to pay $800 CA tax.

The Pte Tax is 9.3$ so Scenario 2 is corrected.

I'm trying to interpret, are you using the word "bonus" to indicate "through payroll" and "PTE" is distributed or not (left in the entity) as taxable pass-through income for that year (net profit on 1120S)? I can't tell if it is "either this or that" or it is "supplementing the base pay of $5k with the other $5k or not."

Operationally, there has to be payroll for an S Corp. The person cannot ignore payroll or "let it ride" or take only distribution," in other words, if they do the work (employee-shareholder). And the IRS uses "reasonable wage" as the determination, and that's one reason I would never counsel "let's take $5k wage and $5k bonus". I teach payroll, and there are some standard recommendations I make; once we discuss Reasonable Wage, we also discuss not taking any other funds so routinely as appearing to supplement or bypass payroll. I don't know how CA PTE would handle the IRS recharacterizing funds are related to earnings subject to payroll, if examined.

As you mention, there are other activities affected, including tax provisions that are limited or related to MAGI and AGI, refundable and nonrefundable credits, retirement eligibility, limits and matching, and even SS credits to consider, when it comes to messing around with payroll vs not payroll. It isn't just how much money do I get, net. This is especially true for the women who traditionally "help" their husband who is self-employed, and later realize they have no or little SS credit of their own, because they never got paid through payroll for that work. Sure, the household benefited, but in the long run, it isn't on the record.

After reviewing the provided information, I can offer some observations regarding the two scenarios presented:

1. Bonus Scenario:
- The S Corporation has a $5,000 corporate income.
- No PTE payment is made.
- A $5,000 bonus is given to the shareholder, with $1,000 withheld for federal income tax, $500 withheld for California (CA) tax, and $500 deducted for payroll taxes.
- The net cash to the shareholder is $3,000.
- There is no net corporate income for federal or CA taxes.
- The shareholder incurs a $1,000 federal tax liability and a $500 CA tax liability, both of which are covered by the withholding.
- The net cash to the shareholder remains at $3,000.

2. PTE Scenario:
- The S Corporation has a $5,000 corporate income.
- A $5,000 PTE payment is made.
- There is no net cash to the shareholder directly.
- The federal net income remains at $0, and the CA net income is $5,000.
- The shareholder incurs no federal income tax, and the CA income tax is $500.
- The PTE tax credit of $5,000 covers the CA tax liability.
- The shareholder indirectly receives $500 in cash through tax savings, and the remaining PTE credit of $4,500 is carried forward for future use.
- The net cash indirectly to the shareholder over 1 to 5 years is $5,000.

In summary, the bonus scenario provides immediate net cash of $3,000 to the shareholder, whereas the PTE scenario does not provide direct net cash but offers tax savings of $500 with an additional PTE credit for future use. Over time, the PTE scenario results in a net cash benefit of $5,000.

It's important to note that these observations are based on the information provided. Depending on the specific circumstances and applicable tax laws, there may be additional factors to consider. It is recommended to consult with a qualified tax professional for personalized advice based on the client's situation.