Discussion:S Corp Salary On Amended Return
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| 19 December 2005 | |
| If you have a client that has taken distributions but no salary from his S corp, can distributions from a previous year be reclassified into salary on an amended return and client pay payroll taxes for that year? | |
Figuringitout (talk|edits) said: | 19 December 2005 |
| 19 December 2005 | |
| If salary should have been paid but was not, this can be done to correct an error. Why would you want to anyway? You will need to prepare W-2, W-3, state payroll returns, amend 1120S and amend 1040, and pay penalties on all taxes due! | |
| 20 December 2005 | |
| I agree with DZCPA, why do this now on an amended return so the IRS is really on notice that the shareholder was "hog" (remember the cliché "pigs get fed & hogs gets slaughtered")? Although it's true that the IRS is trying to pull all S Corp returns with distributions on Sch M-2, but no officer salary; I wouldn't necessarily alert them to your specific client because 1) your client may not be pulled for audit with this specific adjustment 2) maybe the statute will lapse or 3) if you're client is pulled, you can always negotiate a fair salary & settlement.
My recommendation is do not amend prior years for this reason; however, correct from this day forward by paying the shareholder a salary (it's not too late for calendar year 2005). Also, consider building a case, e.g. start the client on gathering facts, for not paying wages in prior years, such as "the shareholder was saving $ for future capital growth" or "received bad tax advice from a previous accountant (if this was not you, of course)". Focus on: type of business - capital intensive vs. service; # of hours shareholder worked compared to other employees; compare revenue generated by other employees or possibly technology to the shareholder's contribution, etc. I know you want to show the IRS that your client is now being "good", but don't take them to the slaughterhouse for redemption! | |
