1. If I place the income on Line 7 of the 1120s, will I be able to use Line 7 on the 1040 Personal Return to show that income under wages (even though there's no W-2) or will I still need to, or be able to, place the income on Line 12 of the 1040 as Business Income. Or maybe a better way to phrase it is to say that .........since I / the company has not produced a W-2 for myself, can the income still be shown on Line 7 of the 1040 or does this mean it must go on line 12 as Business Income or some other line?
If you are taking compensation (W-2) from the S Corp than you will report that as wages on Form 1040 and officer compensation deduction on Form 1120S.
Your company will have to issue Form W-2 and do the quarterly payroll tax filings and pay the payroll tax liabilties resulting therefrom.
2. Does there definitely have to be a w-2 if I place my income under Compensation of Officers or is it OK to use line 7 of the 1120s and then pick that income up on Line 12 Business Income which would then go to Schedule C-EZ?
When you have a S Corp, you need to take a reasonable compensation from the Corp. Not taking such a compensation is a red flag.
Yes, there has to be a W-2 if the deduction is taken as officer compensation and it is reported as wages on Form 1040.
3. In keeping with the concept of placing the income on Line 7 of the 1120s what are any other suggestions? It seems like even if my company is late in paying the Unemployment Taxes, (and late in filing the w-2 if necessary) the fact that I am making an effort to come closer to payroll status should be a plus rather than a minus.
Since the company is late you may want to report this year as a non employee compensation and report this deduction on Form 1120S as other deductions and pick this up as income on Sch C , Form 1040 and pay the self employment taxes. Atleast this would give you some relief if the IRS questions the payroll from the S Corp.
Beginning this year, you need to run payroll from the S Corp and pay all the payroll tax liabilities and file the quarterly reports as required.
Let me know if you have any question.
Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.
Regarding your answer below
"Since the company is late you may want to report this year as a non employee compensation and report this deduction on Form 1120S as other deductions and pick this up as income on Sch C , Form 1040 and pay the self employment taxes. Atleast this would give you some relief if the IRS questions the payroll from the S Corp."
The above is how I have been doing it each year, however this year since the income has increased wouldn't it be OK / better to put the income on Line 7 of the 1120s and then show that Officer Compensation income on Line 12 of the 1040 as Business Income (going to Schedule C-EZ) and pay the Self Employment Tax as I have always done using the SE Tax Form.
I am trying to find the most acceptable way of showing my income as Compensation of Officer and I assume the regulatory people / IRS would much rather have somebody file a late w-2 and late State & Federal Unemployment Taxes rather than the 'old fashioned way'. As long as I have always showed 0 distribution income and all monies I have taken out have been subjected to the Self Employment tax then wouldn't my thinking be correct. There is no attempt here to dodge self employment taxes by reporting portions of my income as distributions (which I have never done) but rather I am simply trying to play catch-up for not having processed the income through payroll dureing the year,
Regarding your comments below, I have inserted replies to help you be able to get a better feel.
"When you have a S Corp, you need to take a reasonable compensation from the Corp. Not taking such a compensation is a red flag.: I have taken the most that I can and usually it has been $35,000 or less and oftentime less than $20,000 but have always paid SE tax on the full amoint and never claimed any to be a distribution.
"Yes, there has to be a W-2 if the deduction is taken as officer compensation and it is reported as wages on Form 1040." Can I report on Line 7 of 1120s and then pick that income up on Line 12 as Business Income of the 1040 which would then go to the Schedule C-EZ as always
You cannot report the officer compensation on Sch C. It will go on W-2 and be reported as Wages.
If you want to report this as wages than you need to file the quarterly payroll returns, file W-2 and pay the penalties and interest that may be due on such payroll.
And you cannot report this on Line 7 on Form 1120S and on Line 12 on Form 1040.
Last Question: What penalties are involved for filling the W-2 and so forth late versus putting it down as non-employee compensation? I have already spoke to the State DOL and they basically said it was not a big issue to send it in late and then of course they said I will also have to send in the Federal Unemployment in late on the 940. So if the income is $50,000 is the penalty a percentage of the income or a percentage of the payroll taxes that were not withheld? On $50,000 income what would be the approx penalty?
You have been hel;pful and I will be accepting the answer but I would like to know if you can give me a ballpark on the penalties.
Thanks a bunch.
Penalty and interest are a percentage of the payroll tax liability. So considering your payroll of $50,000 the payroll tax liability will be appx.$8500 or even more depending on your federal withholding.
Yes, you will file State Quarterly report, Federal Unemployment report and FOrm 941 and W-2 and W-3.
Due date for filing W-3 with IRS is March 2nd. So you can be on time for this.
Penalties could vary.
Link to the penalties-
http://www.irs.gov/publications/p15/ar02.html#en_US_publink100011754
Certified Public Accountant (CPA)
CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..