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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I have a NV S-Corp, income 2015 about 100k. Desire to pay

Customer Question

I have a NV S-Corp, income 2015 about 100k. Desire to pay myself and wife payroll of $22,050 to provide for another SS qualified income year. So far I have taken cash distributions but have not issues an official payroll check, and have not paid any quarterly estimates. Estimated PnL net is $60k pre-payroll, so the remaining $14k will be a s-corp taxable distribution. We also file a joint return with a 1020S return P/L as one line item on the 1040. S-Corp has never made enough $$ for payroll in the past years so this is the first year I can actually implement meaningful payroll.
So the questions are:
1) If I pay each of us $23k how should it be structured?
2) Should it be just posted as Payroll in the S-Corp without taxes, or?
3) Should the wife be an employees, officer, or shareholder
4) Do I simply send each of us a 1099 and claim SETax on SE1040
Submitted: 11 months ago.
Category: Tax
Customer: replied 11 months ago.
4) What penalties will I pay for not having paid quarterlies.
5) Is this all handled by a standard Turbo tax program?
6) What should I do for 2016 using the same concept, pay payroll monthly, quarterly or end of year?
Expert:  Lev replied 11 months ago.

1) If I pay each of us $23k how should it be structured?

The IRS requires that S corporations "must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly."
2) Should it be just posted as Payroll in the S-Corp without taxes, or?

On payroll - social security and Medicare taxes must be withheld and remitted to the IRS.

Income tax withholding is not required - that is optional - but if there is no withholding - you will have larger tax liability o n your own tax return.
3) Should the wife be an employees, officer, or shareholder

There is no such requirements - but if she provided services to S-corporation - she will receive reasonable compensation in return for services that she provided.
4) Do I simply send each of us a 1099 and claim SETax on SE1040.

That might Ok as a workaround to avoid payroll taxes - however that would ONLY work if there is NO taxable income passed on K1.
If you do have taxable income reported on K1 - the IRS could treat that income as wages and may assess additional payroll taxes.

Customer: replied 11 months ago.
Lev, thanks for your reply.
I am still a little confused on the method to report this income/salary properly from my S-Corp.
I intend on paying both of us (husband and wife) $23,000 Employment each to qualify for the 2015 SS Substantial Year. For myself, I can pay SET, along with a 1040 SE form, and report the remainder as dividends …thereby paying the full 15.3% for SS and Medicare due.
I also understand that if I pay the wife W2 then the money goes to SS first and where if paid by SET it goes to the IRS.So with the intent on doing everything correctly AND lowering the triggers for an audit ..AND as I have not paid quarterly earnings, or other W2 withholding AND not wanting to trigger a bunch of new reporting requirements from SS on employees I may never have in the future .. the question is:1) Can I … and do you feel it would it be less of a trigger, to pay my wife as Self Employed with Employment Taxes (using SET) tax rather than pay W2? (so the payment goes to the IRS first).2) Can I pay my wife as Self Employed if she is not a shareholder … just an officer? How can I make this happen? … or does she simply need to be a shareholder?3) If $xx tax is due (the full 15.3%) does the S-Corp just send out the $23k to the wage earner? Does the Corp deduct any part of the SET as expense first like W2 or?? How is it properly done?4) What forms are correct to report this Employment Income from the Corp to the individual? Do I use a K1 to report the total of Self employment income and dividends? Or are there separate forms for Income and Distributions? Or do I simply use 2 K1 forms. Please describe the the correct paper flow method. That would be very helpful.Thanks, Mike
Your comments are appreciated.
Expert:  Lev replied 11 months ago.

Hi Mike,

There is NO dividends when dealing with S-corporation...

The IRS requires that S corporations "must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation.

So - if there ANY income reported on 1120S - wages MUST be paid.

If you choose to compensate yourself and your spouse via 1099misc as contractors - and deduct these payments - and three will be zero income reported on 1120S - no need to worry about wages.

But in this case you will not have any benefits from S-corporation tax treatment - and you may simply run your business as a partnership or as a joint venture.

Expert:  Lev replied 11 months ago.

1) Can I … and do you feel it would it be less of a trigger, to pay my wife as Self Employed with Employment Taxes (using SET) tax rather than pay W2? (so the payment goes to the IRS first).

As you know S-corporation might provide some tax saving.

That is possible that all business gain is paid to you and to your spouse as self-employed contractors.

Then each of you will file a schedule C and schedule SE with your individual tax return - correspondingly will pay income and self-employment taxes on that amount.

S- corporation will deduct these payments and will have zero business income on form 1120S and no payroll tax liability.

We may conclude that election to be taxed as S-corporation was a mistake - as you will have additional filing requirements and NO tax benefits.

Expert:  Lev replied 11 months ago.

2) Can I pay my wife as Self Employed if she is not a shareholder … just an officer? How can I make this happen? … or does she simply need to be a shareholder?

That makes no difference if your spouse is a shareholder or not.

Regardless - she as a physical person may provide serviced for S-corporation as a self-employed contractor and may receive a compensation for these services.

We just need to be clear (1) what services she provided and (2) the compensation is reasonable.

Expert:  Lev replied 11 months ago.

3) If $xx tax is due (the full 15.3%) does the S-Corp just send out the $23k to the wage earner? Does the Corp deduct any part of the SET as expense first like W2 or?? How is it properly done?

I am not sure what you are trying to achieve here...

If you intend to pay wages - that must be done as soon as possible to minimize the tax impact.

Reasonable wages and employment taxes related to reasonable wages are deducted as business expenses on 1120S.

You might busy with other business activities - and because if that I strongly suggest to use any payroll services - the cost will be much lower compare to penalties.

If you have NO intention to pay wages - I suggest to change your election and treat the LLC as disregarded entity - thus avoid possible penalty for employment taxes.

Expert:  Lev replied 11 months ago.

4) What forms are correct to report this Employment Income from the Corp to the individual?

Wages are reported on pay stab each pay period. It is possible to pay wages in closely held corporations just one time per year.

A corporation pays 7.65% employment taxes plus 7.65% are withheld from gross wages.

Income tax withholding is not required but recommended

You will need to file an employment tax return form 941

See additional information here

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Understanding-Employment-Taxes

It is very important that employment taxes are deposited timely to the IRS

here is how to do that

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Depositing-and-Reporting-Employment-Taxes

In Januarry - we need to issue form W2 to the employee and then file it to the IRS (as an attachment to form W3)

I strongly suggest to use payroll service to avoid situations with late filing and late payments.

4) What forms are correct to report this Employment Income from the Corp to the individual? Do I use a K1 to report the total of Self employment income and dividends? Or are there separate forms for Income and Distributions? Or do I simply use 2 K1 forms.

Do I use a K1 to report the total of Self employment income and dividends?

As we already discussed - there is NO dividends with S-corporation

K1 form reports shareholder's share of S-corporation taxable income.

That amount is included into shareholder s taxable income REGARDLESS if distributed or not.

Self-employment income is NOT reported on K1.

Or are there separate forms for Income and Distributions? Or do I simply use 2 K1 forms.

K1 form is issues to each shareholder.

K1 reported shareholder s share of corporate income, some deduction items and actual distributions.

Shareholder is taxed on his/her share of income regardless if distributed or not.

ONE K1 is issued to each shareholder.

.

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