100%stockholder, Owner,S Corp.

[Bird Legs]

Client, an attorney, formed a PC, electing S corp. status. Will have several employees.
Client and employees will be paid through an employee leasing company.
How will this affect my client, the owners salary not showing up on the corp. books in
view of the IRS looking at Owners salaries?
Client states that his salary will be high enough where the S Corp. will not have
very much in earnings.
Thank all of you for your past and future assistance.

[JON]

Tax return

reclassify his W-2 as salaries.

[JoshinNC]

Is the client using ADP or somebody like that?

If so, the fact that the client's salary and the employees' salaries will not be reported on the client's 941's won't be a problem. Just take a deduction for the salaries, allocating the owner's to office salaries and the other's to salaries.

Now, you should address the issue of his salary being enough to negate his income. I still contend that a salary in excess of $20,000 - $25,000 per year is too much. But, that's a conversation you have to have with the client and determine their risk tolerance.

[Bird Legs]

Yes, Client

will be using ADP. Have not had anything like this before. How would you reclassify
the W-2s issued by ADP, with their name & EIN on the W-2, as being paid paid
by the S Corp? Recognizing that the corp. will be reimbursing ADP for all of this
plus an additional amount?
ADP will be reporting these wages on their payroll reports.

[rosieea]

will be using ADP. Have not had anything like this before. How would you reclassify
the W-2s issued by ADP, with their name & EIN on the W-2, as being paid paid
by the S Corp? Recognizing that the corp. will be reimbursing ADP for all of this
plus an additional amount?
ADP will be reporting these wages on their payroll reports.

There's no "reclassification" involved. Regardless of who issued the W-2, it's Officer Salary paid for by the S-Corp. I'm confident that even the IRS understands concepts such as "third party payer" and "common law employee." You can hedge your bet with an attached explanatory note. I think the only question on audit would be whether the amount was reasonable.

[TaxBird]

will be using ADP. Have not had anything like this before. How would you reclassify
the W-2s issued by ADP, with their name & EIN on the W-2, as being paid paid
by the S Corp? Recognizing that the corp. will be reimbursing ADP for all of this
plus an additional amount?
ADP will be reporting these wages on their payroll reports.

When you say 'their' above in relation to the pr reports above, I'm assuming you mean the pr reports that ADP prepares for the employee leasing company (ELC). Three separate entities; S-Corp, ELC, & ADP (service provider to ELC), correct?

If the set up is as it sounds, then the 'employees' are employees of the ELC and not the S-Corp. ELC provides contract labor and it all gets booked to one line 'contract labor'.

Further, I don't know that corporate owners can be 'leased', even in an S-Corp. You may have a problem there.

Who owns the ELC, by the way? I've run across companies setting up their own ELCs. If you haven't already you may want to check into that.

You may want to look further into the whole 'employee leasing' thing. There seems to be more to it here than just a reclassifying entry.

[JoshinNC]

Here's my understanding of these "contracts"

When you say 'their' above in relation to the pr reports above, I'm assuming you mean the pr reports that ADP prepares for the employee leasing company (ELC). Three separate entities; S-Corp, ELC, & ADP (service provider to ELC), correct?

If the set up is as it sounds, then the 'employees' are employees of the ELC and not the S-Corp. ELC provides contract labor and it all gets booked to one line 'contract labor'.

Further, I don't know that corporate owners can be 'leased', even in an S-Corp. You may have a problem there.

Who owns the ELC, by the way? I've run across companies setting up their own ELCs. If you haven't already you may want to check into that.

You may want to look further into the whole 'employee leasing' thing. There seems to be more to it here than just a reclassifying entry.

ADP agrees to provide payroll services for the company, just like my business or your business would. However, ADP enters into an agreement with the company to report the company's employees as ADP employees and "pays" the taxes for the company. But, the monthly payroll fee is based upon a percentage of gross payroll which includes the ER taxes for the company. The major benefit to this arrangement is that the employees of the company are not eligible for ADP's benefit package, which allows for health insurance to be bought at a rate substantially lower than that which the small business (your client) could get it for. The IRS is well aware of these arrangements, and understands that the company is really paying both the officer's and employees salaries. Therefore, I report it as such.

Right or wrong, this is my understanding of the arrangement.

[rosieea]

If the set up is as it sounds, then the 'employees' are employees of the ELC and not the S-Corp. ELC provides contract labor and it all gets booked to one line 'contract labor'.

Further, I don't know that corporate owners can be 'leased', even in an S-Corp. You may have a problem there.

Who owns the ELC, by the way? I've run across companies setting up their own ELCs. If you haven't already you may want to check into that.

You may want to look further into the whole 'employee leasing' thing. There seems to be more to it here than just a reclassifying entry.

In the typical employee leasing arrangement, the leasing company is technically the employer. However, it is clear that the employees are the common law employees of the lessee - that is, the lessee controls who is hired, what their duties are, how their duties are performed, when and where they perform their duties, how much they are paid, etc, etc. In the case of "fly-by-night" leasing companies who disappear and fail to remit employment taxes, guess who the IRS goes after.

[TaxBird]

ADP agrees to provide payroll services for the company, just like my business or your business would. However, ADP enters into an agreement with the company to report the company's employees as ADP employees and "pays" the taxes for the company. But, the monthly payroll fee is based upon a percentage of gross payroll which includes the ER taxes for the company. The major benefit to this arrangement is that the employees of the company are not eligible for ADP's benefit package, which allows for health insurance to be bought at a rate substantially lower than that which the small business (your client) could get it for. The IRS is well aware of these arrangements, and understands that the company is really paying both the officer's and employees salaries. Therefore, I report it as such.

Right or wrong, this is my understanding of the arrangement.

ADP does this now? Huh. I haven't run across that yet. Do you happen to know their markup (generally speaking)?

One question on what you wrote above, if the S-Corp employees are not eligible for ADPs benefit package, how does the S-Corp get a better rate for it's employees? I would think it would be the reverse.

Also, I'm wondering how you know that the IRS 'is well aware of these arrangements'. If you could provide a cite or link, I would be interested in reading/learning more on this.

Thanks in advance.

[TaxBird]

In the typical employee leasing arrangement, the leasing company is technically the employer. However, it is clear that the employees are the common law employees of the lessee - that is, the lessee controls who is hired, what their duties are, how their duties are performed, when and where they perform their duties, how much they are paid, etc, etc. In the case of "fly-by-night" leasing companies who disappear and fail to remit employment taxes, guess who the IRS goes after.

Hm. So, in your experience, in practical application, the ELC is off the hook? The corporate officers even?

The reason I ask, I have a standing argument with a client of mine who 'leases' employees. My client does all that you mention above and I've been warning him that in blurring the lines he could be personally on the hook for any unpaid taxes. He thinks not.

Further, while the ELC he uses is not necessarily a "fly by night" it is having IRS problems related to PR.

Do you happen to have any court cases or cites on this? I really do need to read up on how this type of situation plays out in real life.

Thank you in advance.

[Bird Legs]

Thank all of you, however, am still a little confused.

Have not had one of these before. My client is an attorney, specializing in real estate.
Just passed his bar exam a short time ago. His wife will be coming in with him. She
is currently a loan officer at a mortgage co. and will continue doing this for the
mortgage co. on a contract basis.
They will also have several other employees.
Now, regarding benefits, what types would they be eligible for in this situation where
all of them will be leased employees? Would it be the same as if they were all employees of the S Corp.?

[rosieea]

Hm. So, in your experience, in practical application, the ELC is off the hook? The corporate officers even?

The reason I ask, I have a standing argument with a client of mine who 'leases' employees. My client does all that you mention above and I've been warning him that in blurring the lines he could be personally on the hook for any unpaid taxes. He thinks not.

Further, while the ELC he uses is not necessarily a "fly by night" it is having IRS problems related to PR.

Do you happen to have any court cases or cites on this? I really do need to read up on how this type of situation plays out in real life.

Thank you in advance.

Here's one. I'm sure there are others.

[96-2 USTC ¶50,549] In re Earthmovers, Inc., Debtor. Earthmovers, Inc., Plaintiff v. United States of America and Sunshine Staff Leasing, Inc., Defendants


U.S. Bankruptcy Court, Mid. Dist. Fla., Jacksonville Div., 94-3548-BKC-3F1, 8/7/96, 199 BR 62, 199 BR 62

[Code Sec. 3401 ]

Common-law employers: Responsibility for employment taxes: Construction company: Staff leasing company.--

A bankrupt construction company was the common-law employer of employees provided by an employee leasing company and could not contract away its obligation and responsibility to pay employment taxes. The employee leasing company was contractually responsible for the payment of the employees' wages and the appropriate withholding taxes. The construction company had primary and, allegedly, exclusive control over the employees and admitted that it was their common-law employer. Although the leasing company had agreed in the contract to pay the employees' wages and the payroll taxes, the construction company directed the employees and had control over the payment of wages. The burden was on the construction company to prove that it had paid the leasing company and that the leasing company had paid the IRS. However, the construction company was not liable for employment taxes for a period after it filed for bankruptcy because the leasing company had already paid the taxes. BACK REFERENCES: 96FED ¶35,038.3962


Richard A. Perry, 1 N.E. First Ave., Ocala, Fla. 34470-6632, for plaintiff. Bruce T. Russell, Department of Justice, Washington, D.C. 20044, for U.S. Ross B. Ward, Jr., 26133 U.S. Hwy. 19 N., Clearwater, Fla. 34623, for Sunshine Staff Leasing, Inc.

[TaxBird]

Here's one. I'm sure there are others.

[96-2 USTC ¶50,549] In re Earthmovers, Inc., Debtor. Earthmovers, Inc., Plaintiff v. United States of America and Sunshine Staff Leasing, Inc., Defendants

.

Thank you!

[JoshinNC]

In my experience their rate is between 13 and 17% of payroll

ADP does this now? Huh. I haven't run across that yet. Do you happen to know their markup (generally speaking)?

One question on what you wrote above, if the S-Corp employees are not eligible for ADPs benefit package, how does the S-Corp get a better rate for it's employees? I would think it would be the reverse.

Also, I'm wondering how you know that the IRS 'is well aware of these arrangements'. If you could provide a cite or link, I would be interested in reading/learning more on this.

Thanks in advance.

Depending upon the benefits chosen by the group. The S-Corp employees are eligible for ADP's benefits, because they are considered ADP's employees. So, if a group of 5 employees has to buy health insurance at $400 per month and ADP gets it for $250, it is advantageous for the group to be on ADP's plan, which is their main selling point.

[TaxBird]

Depending upon the benefits chosen by the group. The S-Corp employees are eligible for ADP's benefits, because they are considered ADP's employees. So, if a group of 5 employees has to buy health insurance at $400 per month and ADP gets it for $250, it is advantageous for the group to be on ADP's plan, which is their main selling point.

So they ARE eligible then. Ok. Your original post must have had a typo.