S Corp Question (salary)

[spanel]

I have been approached by an S-corp that has a problem. They have not been paying their officers a wage, they have just been withdrawing money. What is their best way to get this straitened out as I'm aware that an with an S-corp, all officers that do work for the company must take a reasonably wage?

Start payroll on the officers asap? Maybe figure out the distributions ytd and pay that as a wage in the 3rd/4th quarter?

(if they dont want to do payroll?)
Convert to C-corp? prob wont save any money and now they have corp taxes to pay on profits?
Convert to an LLC? still have SE taxes on distributions.. no payroll issues? Might pay more taxes than an S-corp overall?

Thanks

Chris

[ChEAr$]

I have been approached by an S-corp that has a problem. They have not been paying their officers a wage, they have just been withdrawing money. What is their best way to get this straitened out as I'm aware that an with an S-corp, all officers that do work for the company must take a reasonably wage?

Start payroll on the officers asap? Maybe figure out the distributions ytd and pay that as a wage in the 3rd/4th quarter?

(if they dont want to do payroll?)
Convert to C-corp? prob wont save any money and now they have corp taxes to pay on profits?
Convert to an LLC? still have SE taxes on distributions.. no payroll issues? Might pay more taxes than an S-corp overall?

Thanks

Chris

yes, asap.

But the corporation doesn't have to pay all the profits out as wages. The trick is to determine what a reasonable salary is, depending on usual factors, e.g. time put in, level of knowledge about the business, duties of each officer, how much the corporation would have to pay a person from outside the business to perform the duties of each.

Depending on how long the corporation has been in business, it is reasonable to expect some return on investment for he who put money in. Goodwill should be factored in also if it can be quantified. I'm not saying put that figure on the books of course, just consider it in salary determination.

[JohnH]

Suggest that they take their business to someone who wants the hassle?

Seriously, I'd tell them they need to start paying reasonable salaries RIGHT NOW. Any answer other than agreement with this advice is an engagement ender. And I'd they do agree, the next step will be to do something about the year-to-date. Whether it's lumping it all into 3rd quarter or late-filing 1st and 2nd quarter is a facts-and-circumstances decision.

[BOB W]

Agree, ASAP, for 3rd qtr for all active Officers. Getting time behind them can only help solve there time-bomb.

[AZ-Tax]

How Long w/o Salaries did they go?

I have been approached by an S-corp that has a problem. They have not been paying their officers a wage, they have just been withdrawing money. What is their best way to get this straitened out as I'm aware that an with an S-corp, all officers that do work for the company must take a reasonably wage?

Chris, from time the business started as an S-Corp, how long did they go w/o any salaries?

[spanel]

Chris, from time the business started as an S-Corp, how long did they go w/o any salaries?

From what i can tell, over 10 years.

Chris

[geekgirldany]

I had a client who was in business with his father. They had an S-Corp and did not take salaries. Client said CPA told them it was a way to save on self employment tax. (Whether the CPA did say that not sure). Anyways my client got one of those letters from the SS Admin showing what had been paid in. There was zeros for that 12 year time period. He asked me why and so I had to explain.

I would tell them they will have to do a reasonable payroll. If they won't then I can not do the tax return. They will either comply or not come back.

[dodgedipduck]

I'll bet there's a back story.

They haven't been paying salaries for 10 years, and by coincidence at the same time they're looking for a new tax preparer?

I'll bet those two things are related.

What happened to their relationship with their previous tax preparer? Reg flag.

I'll take a guess at the scenario. S corporation has been filing tax returns with zero wages for ten years. Either the returns are self-filed, or the hired preparer is not knowledgeable/ethical, and works cheap. For whatever reason, the person who has been preparing the return can't/won't do it any more. They interview new tax preparers. They go to someone who explains they've been doing it wrong from the start. The preparer gives them an estimate, and it's much more than the preparer with lack of knowledge/ethics. They shop around. Now they're at your door.

Deciding whether to go into business as a partnership or as a corporation is where the taxpayers get to decide "whether they want to do payroll." There is no choice in a corporation, and it doesn't matter if it's a C corporation or an S corporation. What would your response be to a sole proprietor who said they didn't want to do self-employment tax? You'd say "Too bad. You can't elect to not be subject to SE." It's like calling the IRS and asking to be taken off their mailing list.

The key is "reasonable wages," as indicated before.

Somebody's trying to make their problem your problem. That's fine, that's what we get paid for. But go in with your eyes open and make sure you charge enough to make you happy cleaning up a big mess. There's more to this story than they're letting on. Don't get into something you'll regret later.

[JohnH]

Excellent response by dodgedipduck.

The most important thing is business is learning to hear what the other person is not saying.

[taxxcpa]

There is a good chance that the IRS has not looked into this situation. I've had clients who took little or no salaries from their S-Corp for years and were never questioned. Every year, when I did their taxes, I would explain the need for them to take salaries--to no avail.
One thing they could do is to start paying salaries immediately and hope the IRS won't look at the prior years.

If they began doing it right, they still might be singled out for reclassifying their prior profits as salaries. Technically they probably should file belated W-2s, 941s, 940s, and State Unemployment tax returns which might bankrupt them with all the penalties and interest.

[ttbtaxes]

All the advice above is spot on.

You need to be confident that when you prepare, and sign, the S corporation return that the salaries reported are reasonable. There have been many debates about whether you could be subject to a preparer penalty if you sign a return that shows no salary for an officer doing work.

I would never sign a return with too low, or no, salaries. Off they'd go to another preparer.