grmy2h Posted February 17, 2015 Report Share Posted February 17, 2015 When you find a S-Corp shareholder with unreasonable wages, would you correct it by correcting each quarter or making an adjustment on the 4th quarter? Previous bookkeeper ignored actual withdrawals of shareholder and fabricated 941's each quarter with very unreasonable wages. Quote Link to comment Share on other sites More sharing options...
ILLMAS Posted February 17, 2015 Report Share Posted February 17, 2015 Each quarter, 4th quarter only if the payroll was done in the 4th Quote Link to comment Share on other sites More sharing options...
Lee B Posted February 17, 2015 Report Share Posted February 17, 2015 What do you mean by unreasonable? It's a word which is imprecise. Quote Link to comment Share on other sites More sharing options...
grmy2h Posted February 17, 2015 Author Report Share Posted February 17, 2015 (edited) He reported $2,600.00 per quarter, $10,400.00 for the year. Issued him a W-2 for $10,400. Withdrawals were no less than 18,000 per quarter. Edited February 17, 2015 by grmy2h Quote Link to comment Share on other sites More sharing options...
Lee B Posted February 18, 2015 Report Share Posted February 18, 2015 (edited) On the face of it, it doesn't look good, but it depends, how much of the profit was due to work and sweat and how much was due to return on capital. How many hours did the taxpayer actually work in the business? I had a client who was a 50 % owner in a popular bar. The other owner did all the recordkeeping and each of them took $5,000 in wages per year from a business that for years generated $ 250 K to $ 300 K annual profits. For the 8 or 9 years that I had knowledge of the situation they were never audited. I'm not citing this example as the way to do it. What I am saying is that there are a lot business owners and preparers that are willing to play audit roulette because the chances of getting caught is so low. Less than 1 % now, I believe. In the past, when I had a situation like this, I only went back to the prior year's 4th quarter payroll reports if they hadn't been filed. I always tried to fix the situation going forward. Edited February 18, 2015 by cbslee Quote Link to comment Share on other sites More sharing options...
grmy2h Posted February 18, 2015 Author Report Share Posted February 18, 2015 (edited) Client is the only employee and is a service business. He didn't realize what the guy did until he got the W-2 form. He wants it fixed to reflect accurate wages/withdrawals. I'm trying to figure out the best way to do it. Edited February 18, 2015 by grmy2h 1 Quote Link to comment Share on other sites More sharing options...
Richcpaman Posted February 18, 2015 Report Share Posted February 18, 2015 The IRS has yet to really publish guidelines to what a "reasonable" salary is for a S/H in a S-Corp. There are some court cases, for example, the lawyers with $12k in salary and 200k in S Distributions lost. You state that your guy made 18k per quarter. That is $72k a year. That may be a reasonable salary in his industry. It might be $40 or $50k as well. I would not amend 2014. I would fix 2015 going forward. JMHO Rich Quote Link to comment Share on other sites More sharing options...
grmy2h Posted February 18, 2015 Author Report Share Posted February 18, 2015 He is an electrical contractor. He states that if he hired someone to do what he does, he would pay them at least 40,000.00 per year. But in addition to doing all the service work, he pays the bills, makes the phone calls, etc. It is only him. His spouse did not participate in any way. Going forward I have him on a regular salary and I will be handling the 941's, etc. He is scared if he gets audited it will be worse than if we just fix it now. I have not dealt with this problem. I usually get my clients on the right track from the beginning. Quote Link to comment Share on other sites More sharing options...
ILLMAS Posted February 18, 2015 Report Share Posted February 18, 2015 Just wondering, did the bookkeeper advised the TP to take the monthly distributions? It's very easy for the client to use the bookkeeper as a scapegoat. Quote Link to comment Share on other sites More sharing options...
grmy2h Posted February 18, 2015 Author Report Share Posted February 18, 2015 Client says he hired this "bookkeeping and tax service" to "keep his books, do payroll reports and file his taxes". He says that when he hired him they agreed that client would write checks to himself for payroll and bookkeeper was suppose to do the 941's, state paperwork, etc. Bookkeeper was to initiate payment online. He says he saw where amounts were debited from his account. He never really paid attention to the numbers until he got the W-2. I believe the guy. He is well known in our area and I think if he thought it was being done wrong he would have fired the guy then and gotten it fixed. He has fired him now and come to me in a panic. He has state contracts and is scared if this isn't fixed, it could affect these contracts at a later time. Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted February 18, 2015 Report Share Posted February 18, 2015 What were his wages in the prior year? What was the income in the prior year? Is that reasonable? Get all the facts together and see if what he was taking in prior years was similar to what is on the W2. If not, make a change, if yes, changing salary going forward to reflect the new prosperity of the business sounds reasonable to me. Not enough info to make a call right now, but you should be able to get everything together and make a best judgement call on what to do. I would only go into the 4th quarter if there was a change needed. JMHO. Tom Newark, CA Quote Link to comment Share on other sites More sharing options...
grmy2h Posted February 18, 2015 Author Report Share Posted February 18, 2015 This is his first year in business for himself. He started his company in February 2014. He was an electrician for a large government contractor in DC. Due to his fathers illness he left the contractor, moved back home (here), took a year off to help with dad and then started his own company (after dad passed away). I have not inquired as to what he made working for the contractor, but will. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted February 18, 2015 Report Share Posted February 18, 2015 Ok, just my gut instinct here. If he'd pay someone else 40K, not including his managerial details, then 50K - 55K sounds like a reasonable salary. He should reasonably have some ROI that is not salary. Sounds like he's going to be a great new client, since he wants to do things 'right'. Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted February 18, 2015 Report Share Posted February 18, 2015 This is his first year in business for himself. He started his company in February 2014. He was an electrician for a large government contractor in DC. Due to his fathers illness he left the contractor, moved back home (here), took a year off to help with dad and then started his own company (after dad passed away). I have not inquired as to what he made working for the contractor, but will. First year in business sounds like a great reason to take a modest salary until you see how the business is progressing. Given the facts you just presented, I would leave it alone for the first year wages and make the adjustments going forward. I think I could win on audit with that argument, especially if I can show that the amount was increased for the following year. This may not make you comfortable, so do what you think is best. I would let it ride as is. Tom Newark, CA Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted February 18, 2015 Report Share Posted February 18, 2015 One thing I would fully agree with Tom on is that if you do decide to change the W-2, do it for the last quarter only. You can easily defend that with the logic Tom mentions. 1 Quote Link to comment Share on other sites More sharing options...
grmy2h Posted February 18, 2015 Author Report Share Posted February 18, 2015 Thanks everyone !! I would be comfortable with Tom's logic, but I'm not sure the client will be convinced. He insists that if he has problems with the IRS down the road that he could lose his state contracts. He is a real nice guy, but not a numbers guy and I just don't want to do anything that may cause more problems instead of fixing them. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted February 18, 2015 Report Share Posted February 18, 2015 Then go with his choice. It is his call, after all. And his peace of mind is worth more than any extra tax he might pay. Quote Link to comment Share on other sites More sharing options...
DANRVAN Posted February 28, 2015 Report Share Posted February 28, 2015 $10,800 is not even close to reasonable. Keep in mind the related penalties that you and the client could be slapped with. Case law is not in the favor of the sole shareholder/employee when the income is from personal services. Distributions are usually not allowed by the courts until the stockholder/employee wages are over the social security base. Distributions are usually associated with income from non-shareholder employees or capital and equipment. The key is to research and document what is reasonable. The IRS will have an expert witness as a hired gun when you face them in court. In regards to the under reported payroll taxes and withholdings, there is a good chance of abating the penalties given the circumstances. Quote Link to comment Share on other sites More sharing options...
Randall Posted February 28, 2015 Report Share Posted February 28, 2015 If correcting or amending, just do 4th quarter. I think it's common to 'bonus' the owner at end of year. Adjust bonus out of distributions. Increasing W2 and 4th qtr 941 reporting. Best to do before reporting deadlines but 941-X is next best. Bump him up some for 2014, then go forward with quarterly reporting at a higher amount. If his business is up or down, you can adjust 4th quarter to fall in the 'reasonable' category. Quote Link to comment Share on other sites More sharing options...
the boss Posted February 28, 2015 Report Share Posted February 28, 2015 Funny how things are handled differently in other parts of the country. Here in my area, most accountants and tax preparers simple lump all income on a K-1 and don't bother with compensation to officers. Quote Link to comment Share on other sites More sharing options...
MsTabbyKats Posted February 28, 2015 Report Share Posted February 28, 2015 DH had a business. Everything was a major mess. Not getting into the details....but I made him close that corporation and open a new one....with everything done conservatively and correctly. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted March 1, 2015 Report Share Posted March 1, 2015 Funny how things are handled differently in other parts of the country. Here in my area, most accountants and tax preparers simple lump all income on a K-1 and don't bother with compensation to officers. That could cause a real problem if the client is audited. Unless all the income is treated as SE income by the shs, Quote Link to comment Share on other sites More sharing options...
Terry D EA Posted March 1, 2015 Report Share Posted March 1, 2015 I agree with KC. I don't see how they can justify lumping everything on the K-1. That total from line 1 goes to a different line on the 1040 page 1(sorry line number escapes me at this moment) and does not trigger self-employment taxes. Anyone not aware of this would miss the SE filing requirement on whatever portion on the K-1 that should have been reported on a W-2. Quote Link to comment Share on other sites More sharing options...
rfassett Posted March 1, 2015 Report Share Posted March 1, 2015 To the original post - what is the down side here? If your client would win the audit lottery, he would be audited, perhaps, in the worst case scenario, have to pay some FICA, Medicare and penalties and interest. The auditors with whom I have dealt would immediately abate the penalties if I could show that the client came clean the following year. (In fact, I have an audit going on right now where the guy has been using "employees" and issuing no payroll reports and no 1099s - we are talking 5 full time "employees".. The auditor said, come clean now and we will abate any penalty associated with this. (I was shocked.) The biggest reason I believe the auditor went there - we disclosed the situation before he found it out on his own.) But in your case, assuming the worst case scenario, your guy writes a check and the case is closed. Why is he so concerned that this will affect his state contracts? This is not an issue that will be published in the newspapers and trade journals. It is simply a taxpayer not paying attention and then coming clean when he realized there was something wrong. I would be inclined to leave sleeping dogs lie. But if I were to do the fix, I would do it in the fourth quarter. I did go back and fix one client's payroll records for all four quarters a few years back and I was amazed at how much time and effort was involved, Unless there are extremely extenuating circumstances, that ain't happening again. Good luck! Quote Link to comment Share on other sites More sharing options...
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