Filing of 1120S

[Brian EA]

My Client SCorp had a gross income of $32000 and a net income of $22000.
He did not pay himself, however he took a distribution of the whole thing. Do you think this would be a problem with the IRS

$11000 was washed with rental loss .

Any suggestions

[Unregistered]

distributions

it depends on whether the shareholder performed personal services. if he/she simply owns all the shares, but does nothing for the company than there is no requirement to take a salary. however, if he/she is performing services (i.e. working in any capacity) than the IRS could go back and turn the $22000 into salary and require SS and Medicare plus interest and penalties.

[veritas]

This might help. On a recent audit for reasoable wages the auditor allowed a 10 percent return on investment by the shareholder. He also included the market value of the business in the computation. For example: Basis in scorp is 25,000 plus fairmarket value for going concern or blue sky @75,000. Total stock value $100,000.

Thus the auditor would allow 10,000 in distributions and the rest was wages.

They are definitely making a project out of this. The IRS internally believes they are losing billions in potential revenue. And for high income they are very interested in the 2.9% medicare tax.

[Joe Btfsplk]

Explain it to a client

I have clients who take no salary from their S Corp. Every year I explain that the IRS could reclassify the entire profit as salary. But if they fail to take a salary, I just have to report it as it is and let them take that risk. None of them has been challenged yet.

One client who DID take a salary, but did not show officer's salary separate from the other salaries. Later we sent an amended return breaking out his salary.

I think this time the IRS may be getting serious about the threat to reclassify profits as salaries.

[Brian EA]

Another 1120s Scenario

My client is a Real Estate Salesman and he earned $70,000 in 2005
The Corp was set up in March of 2005.He did not take a salary. i have to see him this weekend. Instead of issuing a w2 ,would it be OK to issue a 1099misc. He will still pay the SS and medicare tax
Any suggestions

[Matt Sova]

Absolutely not

An officer by definition is an employee of the corporation. Take a wage of about 12k in the 4th q 2005. Do not take Federal or State withholdings and file the form 941 by 1/31/06. Since the tax due (SS and Med only) is less than 2500 you can pay it with the 941.

Matt

[John of PA]

No,not OK

My client is a Real Estate Salesman and he earned $70,000 in 2005
The Corp was set up in March of 2005.He did not take a salary. i have to see him this weekend. Instead of issuing a w2 ,would it be OK to issue a 1099misc. He will still pay the SS and medicare tax
Any suggestions

No it is not OK to 1099 the income to an S shareholder. Yes using the 1099 is 100% better than just taking it as a distribution, but you will still get an adjustment from IRS. SS and HI already paid, you right. Here's what not already paid: penalties for late deposit of 941 taxes; state and federal unemployement payroll taxes. IRS will report the situation to your state. Also workmen's comp insurance on the salary is required by law and not paid. The 1099 could be used as negation tool for a client who won't budge on setting up a payroll, then once you get them doing 1099's, then maby the next year you can talk them into a full payroll. Best Wishes with this.

[Gretel]

Disagree

This might help. On a recent audit for reasoable wages the auditor allowed a 10 percent return on investment by the shareholder. He also included the market value of the business in the computation. For example: Basis in scorp is 25,000 plus fairmarket value for going concern or blue sky @75,000. Total stock value $100,000.

Thus the auditor would allow 10,000 in distributions and the rest was wages.

They are definitely making a project out of this. The IRS internally believes they are losing billions in potential revenue. And for high income they are very interested in the 2.9% medicare tax.

Disagree with auditor.I would fight that. If you as a shareholder are personally at big risk because your signature has signed over almost everything you owe (I am thinking of someone who has 10 rentals and could loose all of them) you surely want to see some more reward than just 10%. Nobody would take this kind of risk for 10%.

[BOB W]

RE Salesman......

...are not allowed to be a corporation, at least here in NY. They are working under a broker's license and must be a 1099misc.

While this has nothing to do with your question I thought it would be interesting for you to know.

[veritas]

Disagree with auditor.I would fight that. If you as a shareholder are personally at big risk because your signature has signed over almost everything you owe (I am thinking of someone who has 10 rentals and could loose all of them) you surely want to see some more reward than just 10%. Nobody would take this kind of risk for 10%.

My point is the IRS has made a project out of auditing S-Corporations. They want the fica taxes. The case I had has already been settled and there are other factors which I have not mentioned.

If you have a high income scorp with little or no wages I would expect a letter from the IRS.