Discussion:S Corp Officers no payroll
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Discussion Forum Index --> Tax Questions --> S Corp Officers no payroll
| 11 October 2009 | |
| So I've been reading posts all mornining trying to find a difinitive answers. Here's the problem in 2008 S-Corp all three Officers took $25K as "draw" with no payroll. I've already spoken to them about payroll and they are all receiving payroll checks for all of 2009. In prior years they have taken $65K in wages. So I'm wondering if I should go back and amend payroll reports and issue them W-2s for 2008? I'm working on tax return now, it has not been filed nor have their personal returns. I'm afraid if I send in return with no officer wages that it will "red flag" them. Their income was in excess of $650K. My thinking is amend payroll reports now, pay the payroll taxes as it will be more costly if audit happens. Any advice? | |
| October 11, 2009 | |
| Kathie - there are differing opinions on this board on this issue. The decision is yours to make; I just finished doing delinquent W-2's and the payroll returns for a client in the same situation (altho the dollars are quite a bit smaller). I wasn't willing to take the risk professionally, so I discussed it with my client and they agreed to paying the penalties on the delinquent payroll liabilities.
I'm curious why your clients did payroll one year, then decided not to. It doesn't sound like there's a cash flow problem - not with $ 650k in income. You also have to address what the 'reasonable salary' should be for 2008 with $ 650000 income....I'm assuming that's the S-corp net income. | |
| 11 October 2009 | |
| I don't think the 650K relates to net income if they only took 25K in draws. I think the 650K is gross 1120-S income OR (maybe) the 1040 income. | |
| 11 October 2009 | |
| Correct Kevin the $650K is not net, 2008 was a really bad year, in fact they have a loss for the 1120-S. They got jobs the last quarter which is when they took 18K each. They could not afford to pay me so they stuck their heads in the sand and thought this was the proper thing to do. They avoided numerous phone calls and finally got me all of the tax info this week. What can I say, they made other costly errors but I won't go there. So I've already discussed with them just needed a little reassurance that I was doing the right thing. Like I said better to fix now before tax returns are filed. Now let's see if I can get it all done before the 15th. Thanks for the speedy reply. | |
| 11 October 2009 | |
| If there was a loss, it makes sense that there was no salary taken. I wouldn't compound the loss now at this stage. | |
| October 11, 2009 | |
| With a loss, reasonable salary isn't as much of an issue. But taking the distributions could complicate things if the IRS challenges it down the road.
There are many here who would book the distributions to shareholder loans, then clean it up with payroll in 2009. Perhaps JR1 will chime in soon... | |
Actionbsns (talk|edits) said: | 12 October 2009 |
| I agree with Belle, if there's a loss for this year, I would book the distributions as loans to shareholders, then bring them into payroll for 09. I'm also going to put out another scenario for discussion or attack (little smiley thing here). It doesn't sound like they've taken a lot of money, can it be booked as management fees to the corporation, then on the 1040, either file a schedule C, or on line 20 (for miscellaneous income) book it as income subject to FICA/MC so those taxes are paid at the personal level. I wouldn't go to payroll if I could avoid it, penalties are really steep and not deductible. | |
| October 12, 2009 | |
| Relax. And thanks for telling us the real stuff. 650k isn't income, it's revenue. Kind of big diff. So no salaries required, loss showing, plenty of prior year profits to pay out. Move on. | |
| 12 October 2009 | |
| I'm with JR. Easy for me to say, I don't do any compliance work, but if I did I'd let this sleeping dog lie. | |
Actionbsns (talk|edits) said: | 12 October 2009 |
| JR, how do we know there are plenty of prior year profits to pay out? Jkodah doesn't say that. | |
| October 12, 2009 | |
| I just connected the dots when he said it was a really bad year, implying that prior years weren't, and somehow got the impression that salaries reported weren't real high anyway. Reading between the lines, I know. Still, with no profits, I don't see anything suggesting salary is required. | |
Mikex2e7n5 (talk|edits) said: | 13 October 2009 |
| Booking the distributions as loans while not having a salary is just the type of issue the IRS employment tax people were trained for earlier this year regarding preparer penalties. Could be a $5,000 kiss if you prepare and sign that return. | |
Mikex2e7n5 (talk|edits) said: | 13 October 2009 |
| But there are DISTRIBITIONS, right? It seems to me that if they are receiving distributions a reasonable salary needs to be paid. Salaries need to come before distributions and loans. Would the officers d the work they did for someone else for nothing ?
Now if there was a loss and no distributions, no loans, no nothing to the officers, then I could see that. | |
| 13 October 2009 | |
| Jokadah, Please let us know if the S-Corp had sufficient AAA to pay out those distributions. I believe this discussion cannot move forward without this information. What was the AAA balance at the end of the year before those distributions? | |
| 13 October 2009 | |
| You should not let the threat of penalties interfere with sound professional judgment. While the IRS has been training compliance personnel in this area, it is well known within the Service there are significant hurdles in proving wrongdoing by a preparer in situations such as whether to book as a loan or not (with a loss). The government will have to weigh the resources necessary to demonstrate the misconduct in litigation against the reality that reasonable alternatives in the treatment of similar situations do exist. | |
| 13 October 2009 | |
| Yes, but they're hoping that we will realize whose shoulders will bear the burden of paying for the defense against the assertion of preparer penalties. | |
Death&Taxes (talk|edits) said: | 13 October 2009 |
| IRS is winning if we are talking about preparer penalties.
As I see the instant matter, any preparer problem would come from ignoring the term 'draw.' I am guessing that is what the checks say based on the original post. | |
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