Discussion:Amend 941 & W-2, or ???

First I want to say thanks to all of you who contribute regularly. I've gotten a lot of good advice here.

I have a question for you. First some background.

I have a sole prop client who decided to save on payroll processing fees. He only wanted to run payroll twice a month rather than every week. BUT....

He still wanted to pay his employees every week. So, on the weeks where he did not run payroll via the service, he paid his employees with paper checks and posted their payments to an asset account called, "Employee Advances." Then, on the weeks where he ran payroll through the service, he added the advances to the payroll, and cut a net check (all this done through a third party payroll provider).

After spending about ten hours combing through his payroll records in QB vs. the records from the payroll service, I found that some of these were actually done correctly. But I also found that over $17K in payroll checks to his employees DID NOT get run through the service at all. The $17K was just like cash payments to the employees

So I have considered three possibilities to correct this and would like to know your thoughts on them:

1. Amend the 941s and W-2s for the year. I estimate that this will cost him about $5K in taxes, penalties, and interest.
2. Add the $17K to the next year's books.
3. Forgo the $17K deduction altogether on his business books. In other words, do not take the write off. This makes his current payroll on the books match the current 941s/W-3. He's missing the deduction, but he's also missing the penalties and interest if he amends the 941s/W-3.

Your thoughts? Do you have another idea? Thank you.

Finally, please complete your profile as many of us (usually me for one) will not respond to posts without profiles.

This is exactly the kind of thing that happens when people do things on the cheap.

And no, no money was withheld on the "advances". They were not processed through payroll at all. On the books they are just like cash payments.

Thanks again, very much.

The first few years in business I used such a system manually without a payroll service because neither I nor the office manager wanted to spend lots of time in tax season doing payroll, so I paid advances and then at the end of the month collected them from the 4 week paycheck. The office manager totaled the four weeks of timesheets for hours and paid gross pay based on the total, deducted taxes and the advances and gave the employees a net check.

So if I am your client and I am giving the payroll service my payroll for two weeks, I base the pay on 80 hours, not 40 hours and have them deduct the advance (we used the term 'Loans & Exchange). If he did give them 80 hours on which to base the pay, shouldn't the problem only be uncollected advances, not extra pay. The only way I can see extra pay is if worker A did not work week #2 and he did not turn in payroll for that person.

In theory, at the end of the year there should be a balance in the advances account, but is it not possible that these people were overpaid, not underpaid? In such a case the W-2 would not change, but rather the employer would have to collect the advances he failed to collect.

Thanks D&T for getting the discussion back on track.

Can you explain what you mean by "uncollected advances?" I don't understand what you mean by "uncollected." By whom? From whom?

I guess I'm really slow... the employees were overpaid but the W-2 doesn't change? I don't see where you are going with this.

When I added the balance in the Advances account with the balance in the Wage Expense account, it's about $20K more than what the payroll service is showing as paid to the employees.

I think D&T is saying that maybe those advances are still just advances; not part of last year’s payroll. How much *should* the employees have been paid in total for the year, and how much does the payroll service say they’ve been paid? If those two agree, but the employees received something more, then the employee owes the excess back to the employer (that’s the uncollected advance), but your payroll reports may be fine.

Example:

Say the employee is supposed to be paid $100 per week – a total of $5,200 over the course of the year, half of it “advances” from the employer, and half through the payroll service (which calculates 2 weeks’ pay and deducts the advance paid out the prior week).

Possible Problem 1:

The payroll service ends up with 52 weeks’ pay in its system, and files the payroll tax reports accordingly – the W-2 says $5,200. But the payroll service forgets to deduct an advance one time, and so the employee still owes that extra $100 back to the employer (they’d have received $5,300 for the year, when due only $5,200). That $100 is not a bonus/extra pay that would require changing the payroll tax reports, it’s an “amount due from employee.”

Possible Problem 2:

On the other hand, if the payroll company didn’t even process some employees some weeks, then that could result in the payroll tax reports understating wages. The employee is due a total of $5,200 for the year, and received $5,200, but the W-2 shows only $5,000 because two weeks of advances never got processed through payroll.

Can you tell, from a sampling of W-2s/ and timesheets/salary reports/whatever which of the two problems you have? Your original post implies it’s Problem 2, and D&T was, I believe, asking if it could be Problem 1.

Skasslea's post ended this. The W2's should reflect cash payments, all of them, unless there is some basis (not yet offered) for classifying the omitted payments to employees as something else.

Correct W2's an 941s is pure math, no tax issues involved. The employer screwed up. It needs to be mathematically corrected. Allow me to deflect any notion that I fanned any flames.