skier_j

An S that paid no wages to its sole shareholder is going to subject to sanction because it is considered to be evasion of payroll taxes by IRS.

You have no real choice right now, you file the 1120S and the total net income passes out by way of the 1120 S Form K1 to your personal return and those amounts end up on Sch E and get income taxed but escape self emmployment tax.

sometime , maybe 6 months to a year from now, you will get an inquiry about the lack of payroll and what will eventually happen is that you will be liable for social security and unemployment taxes on some measure that the service deems an appropriate salary fo teh owner based on the norm in that industry.

new_taxy

Why? Cant he just pay himself (W2) for Dec '09 sometime this month? Like a one-big lumpsum check at the end of the year?

Couldn't he also issue himself a 1099 from the S-corp and pay personal taxes?

skier_j

I suppose if the S Corp is on the accrual method it could accrue and pay out a payroll now for 2009. It can;t wait too long tho because there is a 45 day rule (I think) for accruals to more than 5% owners.

problem is that is still a 2010 W2 item not 2009.

1099 misc---maybe. We sometimes get locked into what we have always done. On its face it sounds like a not to bad idea under the circumstances---but still requires an accrual and the 1099 actual payment would now be a 2010 item.

Unless you are suggesting some sort of creative bookkeeping, which I am sure you aren;t, right??

new_taxy

He could always reclassify the money he took out during 2009 as 1099 income, couldnt he?

skier_j

perhaps. again, not something I've ever done with an S Shareholder, but I suppose it could work out ok.

I've been trying to come up with a good reason NOT to do that and so far I'm drawing a blank....

The corp is still exposed on the payroll tax issue, but the burden was just shifted from corp to shareholder---so the service might acqueisce or they might not.

Did actual cash distributions more or less equalled the profit? the original post is not that clear on that, it almost sounds like no distributions have been made.

If there was distributions and no significant deferral and the equavalent of both halves of social security were paid, not in the usual manner, but paid none the less, then the IRS might let that slide or not.....I'd not want to hang my hat on that tho....

Skyhawk

Is this a single owner (one shareholder) S-corporation? Does the S-corporation generate income by selling a product, or a service? If the S-corp as one shareholder then he/she is an officer of the corporation by statutew (section 1402 IIR). An officer of a corporation is an employee (by law) and the periodic distributions to the shareholder are wages. The government has won numerous court decisions on this issue and the information is readily available in published materials. The best case you can possibly make is for a reasonable return on investment to be treated as a distribution not treated as wages, say 10% - 15% of your capital investment. How much did you invest to start thre business, $500, $1000? This is generous considering todays interest rates. Anything over and above that amount is employee wages subject to employee withholding, as required, and reporting on a quarterly basis. Playing the "games" suggested above could get you a room with Bernie Maddof.