If a corporation shows no compensation to its officers the IRS will take notice. They want all corporate officers to receive salaries and pay tax on such salaries.
What kind of business are they into? Is the net income going to be $200,000 after all business related deductions and depreciation ,etc.?
Yes, I'm afraid the IRS will take notice if I leave Officers Salaries blank. The business is an internet marketing firm. Young guys, very bright about SEO -- not too schooled in accounting. They thought everything was deductible.
I'm still working on the depreciation schedule, but yes, it looks like there will be net income of about $200k. If I reclassify some of the distributions as payroll (say $50,000 each) and pony up for the penalties and interest -- would that be better than drawing attention to the entire return with no Officers Salaries? $50,000 would be reasonable because it's about what they paid their employees.
Or, am I making matters worse by drawing attention to their lack of S Corp knowledge?
There is no simple answer to this. One of the suggestion to you would be to show $50000 to each of them as 1099 contractor payments so that they can report this on their Sch C and pay taxes for the last year. By doing this the IRS will get the Self employment taxes (do there is no loss of revenue there) and the S corporation will not have to go back and do the payroll and file everything and pay penalties.
Of course, it is possible that they would owe some penalties on their personal tax return for underpayment of estimated taxes but it would be simpler to handle it in this manner than showing it as payroll from S Corp.
Also, should IRS have some problem, they can atleast be able to justify their stance.
But for current year, I would suggest that they get on some payroll plan.
Let me know if you have any question. Bonus and Feedback will be highly appreciated!!!
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.
Let me make sure I understand you: I would reclassify their distributions as "outside services" to contractors. That way, the 1120S would show little or no net income and the IRS would (possibly) be okay with the Officers NOT taking salary.
The two shareholders would include Schedule C's with their 1040's for 2006 and that way if the IRS questions the lack of payroll taxes, they could show that they made up for their lack of understanding "reasonable salary" for an S Corp?
Yes, that is what I am saying.
Certified Public Accountant (CPA)
CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
Renu: this seems pretty creative to me -- I will explain it to them and see if they are comfortable with each paying their own SE taxes, instead of having the company pay.
I do appreciate how fast you answered. I wish I could offer more of a bonus, but this time I am paying from my own meager funds. Next time, I will ask a question using their company card -- and send a bigger bonus! Thanks for your time.
Thanks!!