SCorp

[LBR]

A new S Corp client's balance sheet is out of balance. After asking him to look over his expenses, etc., he e-mailed me that he took personal draws of $36,000.00 and that he paid his workers cash instead of payroll checks (they are also on the payroll). The amounts that he paid his worker's cash were over $5,000.00 each. How does he expense the cash that he paid to his workers and his disbursement? Shouldn't he have given the workers 1099's? Thanks

[geekgirldany]

Yep and if he wants to claim that amount as an deduction he is going to have to get W-9s and send those people 1099s. He obviously knows what he paid them as he gave you an approximate amount.
If he will not do that then I would not claim as an deduction and put towards shareholder distribution. That is how I would handle it.

[Lion]

No. He should run the cash through payroll so it's on the W-2s.

Did the S-corp pay your client a reasonable salary?

Have a face-to-face talk with him about how corporations work and what types of things invite audits.

[buzzardbreath]

Amended W-2s and 941s

Client should re-issue W-2s to the employees given cash. The only thing that should be different should be the taxable wages, taxable social security wages, and taxable medicare wages. No change should occur in withheld tax, withheld social security, or withheld medicare.

The final 941 for the year should be amended as well. There will be an additional payroll tax liability for 15.3% of the extra pay, so long as the taxable limit on social security wages has not been reached. This is both the employers' and employees' share of SS and Medicare. The employer is responsible for paying both halves of SS/Med and is allowed to withhold the employees' share. If he fails to do so, they he still has to pay both.

There are other models which "gross up" the amounts paid, and I don't dispute it, I just would let it go with the above.

If he doesn't do this, and this occurred during the time he was my customer, I wouldn't continue with him. He knows better, and did at the time. If he has to pay up, it is certain that he will never do this again.