S Corp and SE Tax

[rkamp]

I have a client who has not filed his S Corporation in 3 years (2009/2010/2011) and now wants to file.
During this time he took "owner draw" but was never paid on a W-2 (like he should have been).
His net income in the 3 years is about $125,000 per year. The accountant is showing this draw in an equity account.
He needs to pay taxes on the $125,000, but no SE tax. Now he is disabled and wants to claim the income as self employment and pay the SE tax on the income since he doesn't have enough quarters of social security. My understanding is there is no way to do this since he did not pay himself on a W-2. I don't see any way around this?
Am I thinking this through correctly?

Thanks,

Rick

[Uncle Sam]

S Corp-SE Tax

Since no returns have been filed - reconstruct those draws to salaries - file all the delinquent payroll tax returns and pay the back taxes, file the W-2s. As an S corp owner he's supposed to be taking salaries anyway.
Even though the returns weren't filed, didn't the accountant do any work for the client DURING the years to see that these issues were taken care of - or did he leave it all until the end?

[Burke]

There are going to be substantial penalties for the back 941 tax due amounts. (at least 10%). Amazing how people never want to pay SE until they figure out how much it is going to pay them. I'll be happy when they finally make SCorp profits subject to SE.

[Davc]

Has he ever done payroll?

[Y2KEA]

Notice of inconsistent treatment

I was at a seminar & the speaker said that in a situation such as this you can report the cash distributions on the K-1 & use the 8082 form to treat as SE income. He said he has done this in the past & had no problems with IRS.

[Bees Knees]

I was at a seminar & the speaker said that in a situation such as this you can report the cash distributions on the K-1 & use the 8082 form to treat as SE income. He said he has done this in the past & had no problems with IRS.

I rather doubt it would pass an IRS audit. More than likely, it was never challenged because IRS doesn't have the resources to investigate every tax return that is wrong.

I could probably get away with deducting my cat's vet bills as medical expenses. Just because IRS never audits my return doesn't mean they are OK with it.

[Bees Knees]

I was at a seminar & the speaker said that in a situation such as this you can report the cash distributions on the K-1 & use the 8082 form to treat as SE income. He said he has done this in the past & had no problems with IRS.

BTW, can you give us the name of this seminar speaker? I would like to publically humiliate this speaker on this message board for giving such poor advice to tax professionals who probably paid good money in the expectation they would actually learn correct tax information at the seminar.

[Gary2]

I rather doubt it would pass an IRS audit. More than likely, it was never challenged because IRS doesn't have the resources to investigate every tax return that appears to be wrong.

I could probably get away with deducting my cat's vet bills as medical expenses. Just because IRS never audits my return doesn't mean they are OK with it.

Actually, I'd expect this half of it would pass the audit, since the individual, having received a K-1 known to be wrong, has done the right thing. It's the corporate returns that are wrong (or unfiled), and it's not clear that every employee-shareholder would be held responsible for them.

But I agree with your underlying point. I always worry about "I've always done it this way and never had a problem" as an answer.

[Bees Knees]

Actually, I'd expect this half of it would pass the audit, since the individual, having received a K-1 known to be wrong, has done the right thing. It's the corporate returns that are wrong (or unfiled), and it's not clear that every employee-shareholder would be held responsible for them.

Well, if we are going to blame the corporation and not the (probably) sole shareholder of the corporation, then I would use Form 8919 to report the income as wages and pay the employee's share of FICA. The fact is, it is impossible for a 100% shareholder of an S Corporation to treat himself/herself as a self-employed individual doing independent contract work for the corporation. Any tax preparer who tried to get away with treating it as SE income would get hit with substantial penalties, if caught.

[veritas]

Thay's my

There are going to be substantial penalties for the back 941 tax due amounts. (at least 10%). Amazing how people never want to pay SE until they figure out how much it is going to pay them. I'll be happy when they finally make SCorp profits subject to SE.

tax loophole your talking about.

[rkamp]

Has he ever done payroll?

He has never done payroll.

[rkamp]

Well, if we are going to blame the corporation and not the (probably) sole shareholder of the corporation, then I would use Form 8919 to report the income as wages and pay the employee's share of FICA. The fact is, it is impossible for a 100% shareholder of an S Corporation to treat himself/herself as a self-employed individual doing independent contract work for the corporation. Any tax preparer who tried to get away with treating it as SE income would get hit with substantial penalties, if caught.

Thanks for this suggestion. I think the right thing to do is for the corporation to do the 941 forms and pay the penalties. Looking at the SS-8 form (which seems to be required when filing the 8919) is just going to create more problems for the corporation.

[Gretel]

SS credits

Before doing anything I would check with the SS office. I have heard that they do not give credits, or at least do not have to give credits, on tax returns not filed on time. Probably precisely for the reason that the taxpayer is in.

I am very interested in the outcome of this.

[JohnH]

Another reason not to take on this engagement. It's a mess no matter how the accountant tries to make it right, and in the end guess who will be holding the bag if IRS or SSA decides there's some chicanery going on? When that happens, that client who was so grateful at the outset will then be claiming he had no idea the accountant was doing anything wrong. He will insist he gave strict instructions not to bend any rules. Better be sure that E&O coverage is up to date.

[Davc]

He has never done payroll.

Starting now could end up attracting very close scrutiny from SSA.