Discussion:C Corp

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Pjnieves (talk|edits) said:

12 January 2007
This is a 1st year C corp (small restaurant) operated by sole shareholder and family members. No salaries paid to owner or "helpers". Owner paid some personal expenses out of business account. I believe this would be red flag to IRS having a corp pay no compensation. Should reasonable wages be grossed up, pay the p/r taxes and issue w-2? What about the dividend route? Any suggestions based on similar cases.

Thanks,

JR1 (talk|edits) said:

January 12, 2007
Well, if they take no money out, it's pretty tough for IRS to argue that they should have gotten paid! Now, the personal expenses are a problem, since those will often be classed as dividends. Set up a note for them, start some salary in 07 and take some money off each pay for the note amount so that it's repaid. And you'll be fine.

Pjnieves (talk|edits) said:

12 January 2007
The problem I see here with the pay issue is that if the sole shareholder is not paid, the IRS might go along with that given the start-up status. However, the IRS can argue that the other folks that provided services didn't do so for free. Since business is run by family, the IRS potentially can argue that comp. should have been paid, especially in a C corp. and it wasn't to avoid employment taxes, etc.

Comments please.

JR1 (talk|edits) said:

January 12, 2007
I disagree. If someone helps out and takes no money, IRS doesn't care. It's called a volunteer! Or a friend. When you take money out, then they care that it's classified properly. Since they took no money, no problem.

Jdugancpa (talk|edits) said:

12 January 2007
It's called, "the owner is the last to get paid." There is no problem with not paying a salary if no dividends are paid either. However, Pj has not given any indication how substantial were the personal expenses paid out of the business account. If he paid his mortgage, utilities, kids college tuition, etc, from the corporate account, then maybe you have a problem. If minor amounts, due as JR suggested and classify them as receivable from officer, set up a note and a course of action for repayment.

Pjnieves (talk|edits) said:

13 January 2007
The amounts to pay personal expenses totaled about $10k. Receipts are probably $30k. I understand the owner gets paid last, but I'm afraid there might be payments to helpers not run through p/r. I just don't want to get into an employment tax issue after the fact. I agree though, that in light of everything else it may end up being immaterial.

Bottom Line (talk|edits) said:

13 January 2007
Lots of problems with not paying "helpers" through payroll - minimum wage law, wage and hour board, workers comp, unemployment, etc. Asking for trouble!

Sandysea (talk|edits) said:

13 January 2007
They took 1/3 of the receipts to pay personal expenses...seems like dividend payments to me. The "helpers" are they the family members? Your initial post said that the business is run by family members, but if non family members are helpers, then they would not do this for free. Did some payments to them run through petty cash perhaps? If so, some of these payments could be considered casual labor and if under 600.00 per person would not be subject to a 1099....restaurants however have tip reporting requirements so it is difficult to say if this should have been w-2 wages with either allocated or non allocated tips or a 1099 say to a dishwasher...

I just see a 1/3 of revenue disbursement to the s/h as some payment of some kind. Guess you can set up a note payable, but make sure interest is accrued and then a payment schedule is developed for the s/h to refund the money to the corp in years to come :)

Blrgcpa (talk|edits) said:

13 January 2007
I'd say the shareholder received a net p/r of $10,000. I'd gross it up and issue a W-2. It's not to late to have a 4thq p/r. The 941 is due 1/31.

Anyone else who worked would receive a W-2, not a 1099. All taxes would have to be paid, including suta, futa, w/c and dbl.

Don't take a dividend without p/r. The IRS can say you are evading tax if you do.

If the owner did not get paid, how did he live? The IRS can reconstruct living expenses and say that's what he earned.

Many cash businesses take cash out of the register for expenses. Make sure ALL receipts are accounted for. The bank deposits may not be the actual total. Usually there is also sales tax to consider.

The wait staff may get less than min wage because they get their meals. Tips have to be reported for FICA w/h.

JR1 (talk|edits) said:

January 13, 2007
A new kettle of fish we have here now. This isn't just some personal expenses getting paid, but 1/3 of the sales! Whoa! And I agree with both Sandy and Blrg (how am I to prounounce Blrg anyway? Blurg? Blerg if Jewish..Blorg would Scandanavian I suppose....) that my yellow flag is waving and darkening...how much cash vanished...does the food cost reflect the usual 1/3 of sales, etc. And I agree that it looks like 4th Qtr PR to me, too, and some W2's...don't get caught abbetting a questionable arrangement.

Deback (talk|edits) said:

January 13, 2007
Barbara Blrg - Assuming this company is on the cash basis and decides to treat the 2006 withdrawals as grossed-up wages, when would you deduct the expenses for the employer's share of the payroll tax, knowing that the payroll tax (FICA, FUTA, and SUTA) will be paid in 2007?

Sandysea (talk|edits) said:

13 January 2007
Tsk Tsk Tsk Deb.....hehehe

Death&Taxes (talk|edits) said:

13 January 2007
You made my day, Deb!!! Wanna form a union? Seriously folks, this Corp Tax thread confirms my refusal to touch cash businesses. Nothing good can happen.

Blrgcpa (talk|edits) said:

13 January 2007
If you look at the p/r question you'll see.

The employer becomes liabile for both the EE w/h and the ER expense as of the date of the p/r. This is a current liability and the expense w/b deducted for 12/31 even though it's paid in Jan.

So I was found out! Rumplestilskin is my name! But Barbara is easier to say!

Deback (talk|edits) said:

January 13, 2007
Thank you, Barbara! Sandy and Bottom Line, any comments on the same question? :)

Jdugancpa (talk|edits) said:

13 January 2007
Deb, lets be nice now! Or, "Can't we all just get along?"

Randian (talk|edits) said:

14 January 2007
Does the IRS even care if compensation is paid to C corporation officers? I thought the general rule is that compensation is unreasonable only when too low (S) or too high (C), not when too high (S) or too low (C). If you decide to pay dividends and no salary, isn't that exactly what the IRS wants you to do since it generally maximizes tax receipts?

Death&Taxes (talk|edits) said:

14 January 2007
The answer is yes. There is a separation between shareholders and officers. Shareholders elect a Board of Directors which then elects, and hires if you will, officers, and this is true with either S or C. The idea is that officers will not work without a salary, or some type of payment arrangement. What I am writing is sort of 'street' theory, but it is why IRS objects to low salaries in an S and too high salaries in a C....the reason isn't just taxes. Boards of Directors can be sued by shareholders for authorizing unreasonably high salaries.

Randian (talk|edits) said:

16 January 2007
>The answer is yes.

Yes, the IRS would object to low or no compensation for a C-corp officer? Seems weird, the opposite of their usual stance, but ok. Even if they don't get a salary, the officer might be a shareholder. An increase in company value from retained earnings is an "arrangement" that might be worth it to some people.

>Boards of Directors can be sued by shareholders for authorizing unreasonably high salaries.

True, but why would the IRS get involved in anything regarding the state-law fiduciary duties of directors? Besides which, I imagine most corporations discussed here are small ones, where the directors *are* the shareholders.

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