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.