I have a TP that I've been avoiding...

[TaxBird]

He has a corporation. It didn't make much $$ in '08. Nonetheless, he drew $$ to cover basic necessities. I mentioned he needed to take it as payroll. He said 'not yet' due to the cash being so tight. Flash forward to tax prep time and NOW we have a TP who withdrew money from his corporation.

How to best to minimize taxes in this situation and get my TP backon the straight and narrow? I would like to say though, that he isn't some weasel living high off the hog. He really doesn't have $$ and only took enough to pay basic necessities.

Is my only choice to late file 4th qtr 08 payroll taxes? Seems to me there is another way but it's just not coming to me. Dividends maybe? Hmmm.

I really want to help this guy out but my brain is just fried from this stuff. Tooo many people in tough straits right now.

Any advise/input would be greatly appreciated.

Thanks in advance!

[JohnH]

Dividends are not necessarily the worst thing to consider. And if that's the reality of the situation then you may not be able to pick & choose.

If it's a C corp and income isn't very high, then the net cost of reporting the withdrawals as constructive dividends won't be much different that reporting the withdrawals as payroll. The 15% corp tax rate is about the same as the SocSec/FICA on his payroll plus the matching amount the corp pays.

He won't get SocSec earnings credit and he may miss out on EIC, but on the other hand there won't be penalties on the payroll tax reports. Then there are state tax effects to consider as well.

If you put up some rough rounded figures, it might be an interesting exercise to run the numbers both ways.


If it's an S-corp, not reporting any payroll might present some other problems.

In any event, once you get 2008 straightened out, you shoudl get him to agree to "do it right" from here on out. Otherwise it's time to move on.

[erchess]

I will follow this thread with interest.

I thought that if a corp (C or S) made a profit the owner(s) had to be paid wages that were the lesser of all the profit or what it would have cost to get an employee to do the work involved. I thought that dividends could only be paid after sufficient wages had been paid. I would therefore have concluded that doing late payroll with penalties was the only way to go. I'm glad to learn I was mistaken.

[Snaggletoof]

For TaxBird

Can you clarify whether this is a C corp or S corp? We can be of much more help if we know.

[TaxBird]

Dividends are not necessarily the worst thing to consider. And if that's the reality of the situation then you may not be able to pick & choose.

If it's a C corp and income isn't very high, then the net cost of reporting the withdrawals as constructive dividends won't be much different that reporting the withdrawals as payroll. The 15% corp tax rate is about the same as the SocSec/FICA on his payroll plus the matching amount the corp pays.

He won't get SocSec earnings credit and he may miss out on EIC, but on the other hand there won't be penalties on the payroll tax reports. Then there are state tax effects to consider as well.

Oh good. I was hoping this was the case.

If you put up some rough rounded figures, it might be an interesting exercise to run the numbers both ways.

I don't have it all worked out yet but it's looking like ~$10K max.

If it's an S-corp, not reporting any payroll might present some other problems.

No. Thankfully it's a C corp.

In any event, once you get 2008 straightened out, you should get him to agree to "do it right" from here on out. Otherwise it's time to move on.

Very true.

Thank you for your thoughtful response.

[TaxBird]

Can you clarify whether this is a C corp or S corp? We can be of much more help if we know.

Oh. Sorry. It's a C.