Discussion:What would you do? S-corp No Wages just distributions

She has invested over 250K (cash) in the business since it started in 2005. She has not paid herself a salary but has taken nearly 450K out in 2006. How would you classify the 450K?

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But in general: You'll need to figure out what a reasonable salary would be, and pay the payroll taxes on it. Some file a late 941, others put the amount on Sch C/SE.

Then part of the distribution may or may not be taxable on the 1040 depending on the shareholder's basis.

RE: the topic - I use Sch C and issue a strong warning to comply in the future.

For PVVCPA

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Just pop it into MS paint and add your text.

Gotta figure out how to do fast elephants...

If you prepare an individual t/r different from what was reported to them on a K1, I think there is a boat load of disclosures that must accompany the return. Also, I would be a little concerned about professional liability.

Your initial post does not say if you prepared the 1120S or not. If not, I would think you would have more liability if you did not follow the K1. If you did prep the 1120S, then now you are taking two inconsistent positions, therefore exposing yourself to more liability.

If the 1120S was prepared wrong, and you know it, you must recommend an amendment (including all the p/r reports if applicable).

I think it would take a great deal of time and analysis to determine if a salary was required or not.

However, keep in mind there are a thousand or more reasons for a salary determination, and out of those, there will 2,000 different amounts. Each of these will be from an "expert" at trail hired by your client.

Saw all your other posts and your name just popped right out.

By the way, I have several Scorps that pay absolutely no salary. They have good documented reasons, which I belive will hold up under any examination.

Unlike your people he had no excuse except lack of funds [closing the business went along with personal bankruptcy]. But I am glad to hear a contrarian view.

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My view is I would choose one of two options. The first would be to report it as is. The client did not take payroll and that is how it should be reported. Will this possibly trigger an audit for reasonable comp maybe , maybe not. The point is , that it is not your problem but rather the client. I would lean to filing it as is and let the client know A) how stupid this is and that they run a risk for the IRS to reclassify all as wages. and B) that if they want you to provide income tax help in the future they will begin payroll immediately.

The second choice as I see it is to go back and amend 941's and 940 and w2 and w3 and reclassify distributions as payroll and pay the appropriate tax and penalties.

These are the choices as I see them some will disagree and say just make up a schedule c but I don't think that is a wise decision as some others have already stated. Good Luck to you!

I handle this situation exactly how Sea-tax describes. It is stating the obvious, but I would note that written documentation on the advice I provide to my clients regarding these types of issues makes for a better nights sleep. Sometimes clients forget what they were told, they do... :)

Will

If your client's circumstances are similar, I would give the same advice again. That advice was to just record whatever happened in 2006 and treat it that way on the return, while advising the client to do it right for 2007. As you can see in that thread, though, there were several other opinions as well.

If you have additional specifics to add, feel free to post them here and others will try to help.

On the issue of the replies you received which may have not addressed your question, there is no intentional grief being given to you. Almost all internet message boards (regardless of subject matter) develop a certain flow and personality to them. Some messages, which on their face appear to be either flippant or inane, actually have a good deal of meaning to the regular posters. Examples on this forum include references to dead kittens or fast elephants. By reading different threads on the board you will be able to pick up on a great deal of this after a week or so, so try not to become frustrated.

Just 25 years of CPA experience talking.

Good advice from SEA!

Sch c/se = bad idea

This is specially true if the taxpayer has any kind of retirement plan , 401k, sep , simple. The contribution limits are different for w2 wages versus sch c net profit. Furthermore why do you want to get mixed up in filing a return you know is wrong becasue the cleint didn't listen to you in the first palce?

In fact, were an audit to happen and the issue raised, you can insist upon a closing agreement, causing IRS to just drop it. There's no compliance impact to it if the t/p corrected the situation. There is actually wording in the examiner's performance standards for complimentary evaluation in "writing out of" an issue like this. We would, though, want to not be too stingy as to what % of distributions are salary. IRS judgment as to the entire case could change, an we're back to delinquent 941s plus the issue in the following year.

For me I would leave it as is. The client made his made so let him sleep in it, with proper warnings in writing so he does not come back to you when IRS calls.