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In going through a S Corp returns, I found that W2s had not

In going through a S...
In going through a S Corp returns, I found that W2's had not been issued for me (the sole owner). Instead, the CPA had paid the payroll related taxes under SE tax (as if the company was a LLC).

Question 1: What needs to be done now? Do I need to retroactively file W2's? What is the link on the IRS site with info supporting it?

Question 2: Secondly, the company was closed in 2011. The money paid for salary was not all taken out of the company account, so how should the money remaining in the company account be listed on the final company return ? As distributions? As income (shouldn't be since tax was paid each year on income, right?)

Thanks!
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12/4/2012
jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3,161
Experience: I've prepared all types of taxes since 1987.
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Greetings,

Question 1: What needs to be done now? Do I need to retroactively file W2's? What is the link on the IRS site with info supporting it?
Answer 1: Indeed, the most proper action would be to correct the Form 941 and file W-2 for the salary paid to the employee-owner.
But, since this amount has apparently been included as SE income on the individual return that means that the individual return and the corporate return likely also need to be amended to properly reflect the owner wages.

Given the interplay among those returns it may be best to take all of the relevant returns (941, w-2, 1040 and 1120S as well as any state return such as UCT-6) and discuss the proper treatment face to face with a tax practitioner.
Although not recommended, some taxpayers choose not to make all of those changes due to the effort and cost when there was no underpayment of tax.

Question 2: Secondly, the company was closed in 2011. The money paid for salary was not all taken out of the company account, so how should the money remaining in the company account be listed on the final company return ? As distributions? As income (shouldn't be since tax was paid each year on income, right?)
Answer 2: The final return should have and list zero in the company accounts. The amount that had been in the cash account should be listed as what it was- salary or distribution. If it had not been paid as a salary and was given to the owner that is a distribution.
Even if business stopped as of 12/31/2011 but the accounts had not been distributed until 2012 then the balances as of 12/31/2011 should be on the 2011 return and the final return would be for 2012 (likely a short year whenever the accounts were settled), even if no income or expenses would be on the final return.

Please ask if you need clarification or more discussion.
Thank you.
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Customer reply replied 4 years ago

For Question 1: What is the IRS ruling and/or cases I can see online in similar cases?


 


Question 2: Is there any tax liability on this final "distribution"? Not taking into account income for the year which there was none, what would be the answer and/or how I can figure it out?

Hello again,

In response to the IRS links:

To correct the W-2 you can use BSO to create, save, print, and submit Forms W-2c, Corrected Wage and Tax Statement, online for the current year as well as for prior years. After logging in to BSO, navigate to the Electronic Wage Reporting home page and click on the “Forms W-2c/W-3c Online” tab
See http://www.socialsecurity.gov/bso/bsowelcome.html

Question 2: Is there any tax liability on this final "distribution"? Not taking into account income for the year which there was none, what would be the answer and/or how I can figure it out?
Answer 2: Whether or not the distribution, which is a return of your invested capital, is or is not taxable to you depends on if there has been a return previously of the basis in the stock. Only to the extent that the total distributions over the life of your ownership exceeds the amount invested (less the losses and plus the income reported as subject to tax and other adjustments) is there a capital gain.

But, if properly done, at first, for the year of the dissolution of the corporation there should have been reported by the owner a capital gain or loss on the individual return to reflect the final distribution from the corporation as compared to the basis in the stock. In that case an adjustment would need to be made to the gain or loss if another distribution is being recorded. If not properly done at first, please consider professional assistance.

Question 1: What is the IRS ruling and/or cases I can see online in similar cases?
Answer 1: Of course, IRS action is private and no case can be seen by us.
If you are looking for the code sections, regulations or examples of court cases check the footnotes to the article at http://mcgladrey.com/pdf/s-corp_reasonable_compensation.pdf

Joseph Radtke v. U.S is at http://law.justia.com/cases/federal/appellate-courts/F2/895/1196/46650/

Spicer Accounting v. U.S. is at http://law.justia.com/cases/federal/appellate-courts/F2/918/90/24342/


Please continue to ask if you need more clarification.
Thank you.

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Customer reply replied 4 years ago

1) I'm trying to understand - if each year the S Corp filed a return and on my "salary" paid SE tax, the profit was already taxed as well, right?


 


So the profit + some money that should have been taken out of the account is still in the bank account. Let's say out of the $350,000, $100k was for salary that should have been pulled out in the year salary was received. The rest was taxed in the year income was earned and tax paid then on the income as if received as dividends (non salary part). $250,000 is left as profits already taxed. I had paid in $20,000 to start the business.


 


That leaves a $230,000 of after tax money in the company account.


 


How can this be taxed again? Can you show me an IRS link to show rates and why?


 


2) The links you showed me state that a S Corp has to pay a fair salary. I know that. My question is what cases state that a S Corp failure to file W2's for a sole owner but who paid SE tax has to go back and file the late W2s and fines for not filing the first time?


 


Thanks.

Hello again,

 

2) Paying a salary includes paying employment taxes. Both the employer and the employee are liable for employment taxes. Paying a salary requires filing W-2. The requirements and cases for employers that show that the employment taxes and W-2s must be done apply to the S corp.

The S Corp that has to pay a salary has to do what all employers with employees must do.

1) I'm trying to understand - if each year the S Corp filed a return and on my "salary" paid SE tax, the profit was already taxed as well, right?

 

I am trying to understand what is meant by the S corp paid SE tax as SE tax is not part of a corporate return. That was why I mentioned needing to change the individual return as SE is only part of the 1040 and not part of the 1120S.

 

If the S corp deducted salary then the salary has to be included on the individual return and included in the income of the owner-employee. When it was deducted on the corporate return the salary reduced the profit reported by the corp on the K-1 so the salary has be taxed to the individual in addition to the K-1 profit declared as income (just as it would for any other employee).

 

 

If money was not taken from the corporate bank account then it seems that salary was not actually paid to you in that year. If a deduction was not taken for the salary then it should not later be created when there was no activity. If a deduction was not taken the amount paid is a distribution that is not added to shareholder income (unless or until it exceeds basis).

Rather than trying to create a transaction that did occur from money that stayed in the bank it may be more proper to recharacterize the distributions that were made to be salary.

 

Hope this clarifies for you, even though there is no method for a corp to pay SE tax.

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Customer reply replied 4 years ago

Each year, the foreign earned income exclusion was taken for my income since I was out of the country. When going back and issuing the missing W2s, can this exclusion be taken even though the salary remained in the company account (apparently or at least a part of it)?


 


Thanks.

Hello again,

Again, there may some confusion as to what is part of the corporate tax return and what is part of the individual tax return. The foreign earned income exclusion is a claim that is made on the individual return to exclude that income from tax upon the individual.
That claim can be made on an amended return when appropriate.

There seems to be a larger issue in regard to trying to claim that amounts not distributed or paid to the shareholder employee were wages paid in that prior year. Funds that remained in the corporate account would not normally be considered paid to a taxpayer and an individual only includes in income amounts that were received.

If the position is taken that the amounts still in the corporate account are the property of the individual issue may arise as to the corporate identity not being maintained so that all of the corporate activity might be argued to actually be individual corporate activity and then the entire profit would be subject to self employment tax.

There is consistent judgment of the courts that, although one can arrange one's affairs to avoid tax, once choices are made there is not freedom to later rearrange and choose another structure or form for better result of less tax. This concept is true for many types of transactions.
The more usual case is taxpayers trying to re-characterize taxable wages to be nontaxable reimbursement. There can be IRS re-characterization of distributions made by an S corporation to its sole shareholder as wages for FICA purposes.

There may be a problem with reporting amounts not distributed in a prior year as wages in that tax year. If no other distributions were made over several or all years, perhaps that would support that distributions of all types were left in the corporate account (despite the blurring that causes between the entity and the individual). If there were distributions made and reported in prior years the later amend to re-characterize undistributed amounts may face a challenge as be deemed an attempt to improperly change the treatment of transactions that were made and reported.

Hopefully this provides what you need on the original question; but please consider taking this information to a tax practitioner that can discuss all of the facts and circumstances with you to clear any confusion and to help you decide what, if any, amendment is proper for your situation.

Thank you for the opportunity to be of service.
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Hello again,

 

In case I have not yet overloaded you with information, during some reading I saw a case that includes references to the major cases cited by the courts in re-characterizing dividend distributions made by an S corporation to its sole shareholder as wages for FICA purposes.

 

http://fedt axdevelopments.foxrothschild.com/2012/07/articles/federal-tax-case-law-decisions/eighth-circuit-court-of-appeals-gives-service-a-major-victory-to-recharacterize-distributions-from-an-s-corporation-to-its-shareholders-as-wages-for-fica-purposes/

 

Thank you.

jgordosea
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Satisfied Customers: 3,161
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Customer reply replied 4 years ago

Thank you

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