Single-member LLC, Form 1120 and Payroll for the owner

[LCP]

New client (single-member LLC) who had their bookkeeper prep tax returns (Form 1120) in the past. I am 99.8% certain that they did not use “check the box” to elect to file as a corporation. In addition, the owner has been on the payroll for the last few years at least.

1. Do you see any options other than amending prior year returns to show the activity on a Schedule C? The good news is that there are losses.

2. Is paying a sole-proprietor thru payroll and issuing a W-2 a valid option. I know we’ve let it slide before. Has anyone ever amended payroll tax returns to undo that and get all of the withholding back? I’m considering doing that for 2005 but probably not any further back.

[Bees Knees]

1. No option other than amending prior years returns.

2. No, you can’t pay a sole-proprietor a W-2 wage. The wage would be non-deductible, including any payroll taxes paid.

I suggest you continue to file the 1120. The very fact that the taxpayer has been filing 1120s is an indication the taxpayer elected to be taxed as a corporation, along with payroll and all that other hassle. The only way to stop is to liquidate the corporation assets and go back to being a Schedule C business.

[Unregistered]

Single LLC

The single member LLC who is paying w-2 wages to themselves is actually saving tax dollars. I had a school project that compared a person who had a business. We ran the returns if he was a Sch C, 1120S & 1120. The benefit for being Sch C, is only 1 return, & no Payroll returns. The other two methods even though everything else was the same, he would have saved over $8,000. However he would have to file payroll tax returns, & 1120(s) and 1040.

[LCP]

1. No option other than amending prior years returns.

2. No, you can’t pay a sole-proprietor a W-2 wage. The wage would be non-deductible, including any payroll taxes paid.

I suggest you continue to file the 1120. The very fact that the taxpayer has been filing 1120s is an indication the taxpayer elected to be taxed as a corporation, along with payroll and all that other hassle. The only way to stop is to liquidate the corporation assets and go back to being a Schedule C business.

I think you are saying that continuing to file as a corp. is your suggested option and that amending is the only other option, correct?

Are you also saying that a proper election to be taxed as a corp. then allows that "corp" to pay the owner as an employee?

[OldJack]

Are you also saying that a proper election to be taxed as a corp. then allows that "corp" to pay the owner as an employee?

I suggest you talk to the prior tax preparer to find out what they know about the filing of tax forms and why. Are they filing form 1120 or 1120S?

[LCP]

I suggest you talk to the prior tax preparer to find out what they know about the filing of tax forms and why. Are they filing form 1120 or 1120S?

Other tax preparer is no longer available ............ she filed as a C-corp. Again I'm 99.9% sure it was out of ignorance rather than planning.

[Bees Knees]

Are you also saying that a proper election to be taxed as a corp. then allows that "corp" to pay the owner as an employee?

That is correct. Even if a business does not officially incorporate with a State, if the election is made to be taxed as a corporation for federal tax purposes, then the owner must pay himself or herself a wage for services rendered.