S Corp with no salary

[kkuch]

Just curious what you guys do in the situation of a new S Corp client who does not pay themselves a salary? I have a client who wants me to prepare their S Corp with 150k gross and 80k net income. They did not pay one dollar of salary but took about 40k in distributions. Thanks in advance

[Lion]

I'm busy enough that I wouldn't take on that client !! However if I did, I would insist they go on payroll this minute. And, I would report what they did last year, not try to redo history (no time during tax season to mess with late payroll). I would explain, probably in writing and maybe even requiring them to sign that they understand, that they raised a red flag by not taking salary when they had profits and raised it higher still by taking distributions. If you think they are teachable, then report what happened; or if you have time, turn some distributions into late payroll.

[Uncle Sam]

I have had one client with two S Corporations - same scenario. In one he was a sole owner, the second he had a partner. After attempting for over a year and having him not listen - I dumped him. In both cases - he didn't take distributions either. Both guys had full time jobs elsewhere, and these were side businesses of theirs. The one who owned the one business on his own - was also a 1040 client also. I dumped them also because of unpaid past billed fees as well.

[ATSMAN]

Lion is on the mark. 2 years back I had a similar situation. Owner and his wife took big draws and no reasonable salary. Also there were questionable personal expenses paid from company account. I gave them copies of various articles talking about reasonable salary and made them sign on my engagement letter that they were advised about that but chose otherwise. Sad to say that I only prepared that one return for them and then they went elsewhere.

So be careful with S-Corp owners!

[Toobusy]

They are just making it bad for themselves. When it come time for them to draw SS, there won't be anything draw, they might have to result to SSI. I know people now who are strugglling because they tried to get around paying SS FICA taxes. Now, they wish they had.

However, S Corp has to pay taxes on draw, when I enter the draws on Form 1120S- it generates the taxes they have to pay.

[spanel]

They are just making it bad for themselves. When it come time for them to draw SS, there won't be anything draw, they might have to result to SSI. I know people now who are strugglling because they tried to get around paying SS FICA taxes. Now, they wish they had.

However, S Corp has to pay taxes on draw, when I enter the draws on Form 1120S- it generates the taxes they have to pay.

Thats a new one to me. S Corps dont pay any federal taxes. Draws do not generate any taxable issues as long as the shareholders have basis. All profits/losses flow through to the shareholders 1040 returns.

Chris

[Jiggers]

S Corps must pay reasonable salaries. Just because the taxpayer pays income tax on the flow-through income on the K-1 from the S Crop, he is not paying the required payroll taxes: Matching SS and Medicare. And the states would want the required unemployment tax.

I no longer do any corporations, but when I encountered an S Corp with no salaries, I held up a large red sheet of paper with "AUDIT ME" on it. I told the client that this must go on the return. This was before e-filing. So I lost a client. But I didn't get a headache.

[HRS]

Related to the question that S corp with no salary, I have another question. If the S corp has a business of retail store or a Restaurant which runs with the employees , Do the owner still have to take the salary ?
Anyway he is paying FICA taxes,matching with his employee's SS & MC taxes.

[spanel]

Related to the question that S corp with no salary, I have another question. If the S corp has a business of retail store or a Restaurant which runs with the employees , Do the owner still have to take the salary ?
Anyway he is paying FICA taxes,matching with his employee's SS & MC taxes.

Matching employees FICA is NOT the same as paying SS&MC on your own earnings.

If he is not working for the retail store, then no salary is okay.
If he is doing some work, then yes he needs a reasonable salary for said work.

Chris

[kkuch]

I just realized I never thanked anyone for the guidance. So thank you very much! I actually really liked the client and he knew he was in the wrong. I ended up taking Lion's advice reporting exactly what happened and he was able to run 20k of distributions as late payroll through a payroll company. Based on some other guidance I insisted the client take two years worth of reasonable salary in 2020. One for a remaining portion of 2019 salary (20k was not enough) and one for full year 2020 salary.

Thanks again for everything