Discussion:S-Corp distributions being reclassified as wages?
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Discussion Forum Index --> Tax Questions --> S-Corp distributions being reclassified as wages?
| 24 April 2006 | |
New client....Single-owner S-Corp.Pays himself $2.5k twice a month. When the payment is made he records..... Dr. Retained Earnings $2.5k
Cr. Cash $2.5k Each quarter, he has filed the Form 941 with $0.00. Then, at 12/31, he will reclassify the distributions from retained earnings to "payroll expense" and remit all payroll taxes and withholdings with the 4th Quarter returns. Is this acceptable? I mean, it seems like he pays everything....its just a question of timing. It surely is easier to do it only at year-end.... Thanks...Steve | |
| April 24, 2006 | |
| I worked with a client that did the same thing, and only paid the payroll taxes, etc. at the end of the calendar year. There has never been any issues with the IRS for this client. In addition, I also had the client check the box on the Form 941 that he was a 'seasonal employer' to reduce potential problems since wages were zero for the other 3 quarters. In checking 'seasonal employer' on the Form 941, the taxpayer is not required to file a Form 941 every quarter, but in practice I would have the client file a zero return anyway to avoid any notices from the IRS for not filing the Form 941.
On the plus side, at least your new client IS paying himself wages. Most of what I have read and heard over the past couple years has been the IRS' increase into looking at S Corps where the shareholder is not taking any compensation. | |
| 24 April 2006 | |
| Nothing wrong with it at all. Wages and withholding taxes are considered as being paid in all year, regardless of when actually paid. I have my S's often pay a minimal salary all year, file quarterlies, and then we bonus out the bulk and pay all the taxes on 12/31. Perfectly legal. | |
| 1 May 2006 | |
| All seems ok. Minimize payroll tax effort, delays cash drain for FICA. | |
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