Employee Leasing Service

[JohnH]

There have been a couple of threads on this before, but I decided to start a new one. Client is an S-Corp which has begun using an Employee Leasing Service for all employees, including owner/shareholders. The positives include ability to offer better insurance, retirement, and other benefits, in addition to simplifying all payroll compliance & HR issues. W-2 forms show the S-Corp name on line 1, with "Paychex Business Solutions" on line 2. The FEI number on W-2 is not the S-Corp number - it is the number for Paychex.

So the first issue is how to report the expense for Leased Employees, in light of the fact that an 1120S with no Officer Salaries would likely draw unwanted attention. The second issue is that reporting Officer Salaries when there are no Form 941 filings might also draw unwanted attention. I think the former will likely create more heat than the latter.

I'm leaning heavily in the direction of using an attachment along the following lines (numbers are fictitious).

Total Leased Employee Payments to Paychex Business Solutions: $475,000
Less Officer Salaries Reported on Line 7, Form 1120S : (150,000)
Less Salaries and Wages Reported on Line 8, Form 1120S : ( 180,000)
Less Payroll Taxes Reported on Line 12, Form 1120S : ( 45,000)
Less Employess Benefits Reported on Line 18, Form 1120S : ( 85,000)

Net Leased Employee Payments Reported on Line 19, Form 1120S: 15,000

Anyone have any thoughts pro or con in using this method? At least it would provide a logical explanation if the return were pulled for review (provided the reviewer bothered to look). Secondly, it seems that a 941 mismatch might generate a simple inquiry, whereas an 1120S with no officer salaries would likely just begin with an audit.

[WhiteOleander]

I have prepared a S-Corp for years with this exact situation. I broke out the the shareholder's wages for line 7. But, all the other expenses, I just reported under "other expense" as "Leased Employees". It never seemed to raise any flags. As a side note, this S-Corp has decided to bring all payroll back in house because they got tried of the high fees.

[Snaggletooth]

Somewhat disagree

John, I wouldn't report anything on any lines that suggest salaries or wages. If I understand you correctly, the S corp had zero payroll on its own device, and relied entirely on WheatChex to supply its workers and handle the payroll accordingly. If I have NOT understood this correctly, the rest of my response is probably not relevant.

This S corp apparently would prefer to segment their WheatChex cost into various types of labor cost (including owner's salary), and then report them on tax form lines designed to accommodate true payroll, as if they had one. Problem is they DON'T, and there are no 941s or 940s under the S corp FEIN to support treatment as employees.

From what I understand, WheatChex is NOT a payroll service (whereby they simply handle payroll reporting). If this were the case, there would be real W-2s, 941s, 940s, etc. They are instead an employee leasing service, whereby the employees receive W-2s and the payroll tax reporting is all coming from WheatChex.

This situation is widespread in manufacturing. I've seen plants where only 10% of the workers were actually employees, and they have higher wages and benefits along with maybe Union memberships. The other 90% are "temporary" employees who work for minimum wage with no benefits. The "leased" workers are technically employees of the temporary service.

Wish someone would give me a bowl of cereal so I could shut up.

[JohnH]

White Oleander. Yes, the fees are very high. I think the retirement plan services and employee benefits plans also contain hidden fees in addition to the basic processing charges. This employer is aware of my concern, but believes the fees are acceptable in their situation. They may be right, based on what I've seen with them in the past. I appreciate your info on hw you've handled this same situation. Maybe I'm complicating it more than I should.

Snags: You do have a correct understanding of the situation. My dilemma surrounds the high probability of an audit if there are no Officer Salaries reported on the 1120S And I don't find any requirement that the forms 941 MUST agree with the 1120S, although we know there is some degree of document matching. I think I'd rather reply to a document matching inquiry than to gear up for a full-blown audit, all other things being equal.

Thanks to both of you for your thoughts on this. I'm still pondering it - any other input would be helpful.

[Black Bart]

Well, here's some advice

...I'm still pondering it - any other input would be helpful.

from a former client (said he learned it in the army): "When in trouble, when in doubt, run in circles, scream and shout!"

[JohnH]

Excellent advice Bart.
I learned the same thing in the Air Force.

[ChEAr$]

I have prepared a S-Corp for years with this exact situation. I broke out the the shareholder's wages for line 7. But, all the other expenses, I just reported under "other expense" as "Leased Employees". It never seemed to raise any flags. As a side note, this S-Corp has decided to bring all payroll back in house because they got tried of the high fees.

Shareholder wages are not a separately reported item. Period.

Maybe you're thinking of "officers' wages"?

When I had such a client, Total wages were not reported as one item. Rather the pro rated cost of each category,
cost of goods labor, officers' salaries, and (administrative) salaries were reported on respective lines.

If the payroll burden (payroll taxes plus workmens' comp) was 17%, and gross payroll 100%, then that total of 117% was divied up (divied; not divided!) among those three categories I mentioned above.

And you know what? IRS never questioned it. IRS evidently does NOT match 941 (zero in this case) with payroll lines.

[Burke]

I agree with Chear$. I do not think the IRS matches officer wages with 941's. At least not yet. I had an S-Corp client, whose prior preparer -- for years -- reported "wages" for the owner on 1120S, but issued him a 1099MISC for distributions he took, whichthe TP subsequently reported on his Schedule C. It never caused a question, apparently. In any event, I -- like you -- would rather answer an inquiry about a non-match than an audit because that line was blank.

[ChEAr$]

That sounded like a Chinese fire drill, Bart.