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Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 355
Experience:  Former IRS Revenue Agent
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Megan, we own a husband wife s Corp in Florida. story short

Customer Question

Hi Megan, we own a husband wife s Corp in Florida. Long story short we were audited by state for year 2014 and they reclassed distributions as wages a substantial amount. I am submitting 941x 940x 1120s amended and 1040 amended as well as w2-c w3-c.
My question is for the 4th quarter 2014 now that we owe approx $7168 in payroll tax after these amendments... are we allowed to claim that amount as payroll expense for year 2014 4th quarter even though we will be making payments for it in 2016?
We run as cash based Corp with income in expenses out.. but if I don't adjust the payroll expense/liabilities for 2014 in quickbooks my 2015 and 2016 years will be off. I also am hoping we can deduct it somehow because that would offset some of the owed payroll taxes. Thank you!
Submitted: 4 months ago.
Category: Tax
Customer: replied 4 months ago.
S-Corp
Expert:  Dr. Fiona Chen replied 4 months ago.

Dear Reclassification,

Payroll taxes paid is cash basis. That is, you deduct on your income tax returns in the year you pay.

Payroll taxes paid is deductible as expenses against income to reduce income tax. It cannot be used to reduce payroll taxes.

In Quickbook, you use (designate) the payment for payment made in 2016 to the liability of the last quarter of 2014.

P.s. Have you retained a professional to help you fight the reclassification issue? To appeal it, etc. You don't have to accept the audit result. Have you consulted with local CPAs familiar with the employment tax issues?

Thank you,

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP

Customer: replied 4 months ago.
Should I adjust the payroll numbers in quick books for 2014 for 4th quarter now? If I do it will show negative.. as liability not yet paid. or do I leave 2014 payroll as is and wait to adjust in 2016 taxes after the payrolls been paid?The state of Florida was contacted in 2013 by its to audit business for taking too much distributions verses salary. We fought it to a punt to get the number down some but in the be they still wanted us to take moe reasonable salary. I'm hoping that once this goes through that we don't get audited by federal next for other past years. Our previous accountant never warned that we had too low of salary wages.
Expert:  Dr. Fiona Chen replied 4 months ago.

Dear Payroll Return,

Thank you for the response.

It is a draw back of most canned accounting software. It really does not close the book correctly. And to move the liability to various years is difficult to do. But in general, for your accounting, it is the best way to handle it. Just make sure that in the end of the year, in the year you paid the payroll taxes, you need to include that payroll tax expenses you paid in 2016, for example, in your income tax return of 2016.

As to the federal tax turns, if you accept the Florida compensation to officer amounts, you have go to amend your Federal Payroll Returns as well. The compensation of officer adjustment does not and should not change the liability on your personal income tax. Don't wait for the Federal come to you to audit you. Voluntarily, you need to amend the federal payroll tax returns.

It is good to hear that you fought for the audit result. Move on.

Please feel free to follow up with questions. Otherwise, I am ready to be evaluated by you for your satisfaction with my answer to your question.

Regards,

Fiona

Customer: replied 4 months ago.
I am annebding the 1120s. However I believe I will need to amend the 1040 as well because my wages amount charged and business income on the scheduled k which falls through to 1040. Should I not amend 1040?Regarding the payroll I will not change anything in quickbooks for year 2014 yet ( I will also not change payroll expense on the 1120s ) . When we do 2016 taxes I will then show the payroll expense for the payments and add a line that shows liability for 2014 in the same amount to tie in to each other. Please let me know if I am correct?
Customer: replied 4 months ago.
changed not charged ^ (spelling)
Expert:  Dr. Fiona Chen replied 4 months ago.

Dear Payroll Return,

Let me qualify my answer this way. The final exact number of course needs to be verified with your book and the accountant.

I am assuming that you have S corporation owners' flow through income that have been reclassified as compensation to officer. So, previously, for example, you had flow-through income of 20,000 reported on K-1 which was reported on your personal tax return, Form 1040 on Schedule E.

Now, that 20,000 is reclassified as wages. So, your flow through to your tax return is 0. And that 20,000 shows up as your wages.

So, the total amount on your personal tax return is the same.

Also, there is no need to amend your 1120 tax return for the previous years. There is nothing much changed there. Actually, there is nothing changed. You cannot deduct any payroll tax payments there.

When we have a compensation to officer's issue, the most important thing is the payroll returns and their information tax returns. That is, the 941, 940 and W-2 and W-3. They need to be corrected and reported to the IRS and the social security administration.

They will be automatically matched. There is no tax effect on S Corporation and personal Form 1040 returns. Because there is no tax effect even if the IRS come to audit these returns, because you already paid all the due taxes for this issue, there is no issue for them to audit.

There is no income tax issue for S Corporation compensation to officer. There is only payroll tax issues for the compensation to officer.

As to the second question, yes. Deduct your actual payroll return taxes and interests paid in 2016 on your company's 2016 income tax return.

Regards,

Fiona