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If a taxpayer never filed any payroll tax returns since the…

If a taxpayer never filed...
If a taxpayer never filed any payroll tax returns since the incorporation of his single shareholder S-Corp in 2014 but has made distributions to the shareholder every year, how does he come in compliance with payroll? The taxpayer has neither filed his S-corp returns nor his personal returns for 2014 thru 2016. Which of the following two options is better?:
1) S-corp issues a W-2 for each of the three years (2014 through 2016) and files quarterly payroll forms for all three years
2) S-corp issues a 1099-MISC for all three years and then the taxpayer files a Schedule C (income but no expenses) with his Form 1040 tax return?
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Answered in 59 minutes by:
6/2/2017
Brian Michels
Brian Michels, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 207
Experience: Partner at Michels & Hanley CPAs, LLP
Verified
Hello. My name is ***** ***** I will assist. I am a licensed CPA. If you never filed payroll for the owner and the owner took distributions the IRS could reclassify the distributions as taxable wages. As an S corp the owner / employee should pay a reasonable wage if there are distributions taken. These would be done by filing quarterly 941 and the respective state payroll tax returns. W-2s should be issued at the end of the year. If you file the payroll tax returns they are late and there may be bug penalties for late filing. You may, however, be able to qualify under the voluntary disclosure program. I would advise your accountant to provide some info on this. The s corp should not issue 1099s to the owner as he/she is not an independent contractor. If you have any questions don't hesitate to ask. I'm happy to help. If you need assistance filing all the returns I could assist as well.
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Customer reply replied 1 year ago
62;there may be bug penalties for late filing. You may, however, be able to qualify under the voluntary disclosure program.
Could you explain the above (citing reference to the IRS publication)?
Customer reply replied 1 year ago
62;and the owner took distributions the IRS could reclassify the distributions as taxable wages
What if no distributions were taken from the S-corp? First experience with S-corp - taxpayer was completely ignorant of how S-corp works.
Looking further the IRS voluntary disclosure won't reduce interest and penalties. It's more to avoid criminal charges if there was tax fraud. Here is more in that. http://www.journalofaccountancy.com/issues/2008/mar/voluntarydisclosuretotheirsaviableoption.htmlIf there were no distributions than reasonable payroll is not necessary. What the IRS is looking for is money being moved from the company to the owner correctly. And correctly means that a portion of it (reasonable comoensation) must be paid. If there are no distributions you are ok. However, the IRS also looks at shareholder loans. They don't like when there are shareholder loan receivable because it's essentially a distribution but rather than post to distributions the company may post to loan receivable. Contact me with any questions.
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Customer reply replied 1 year ago
62;but rather than post to distributions the company may post to loan receivable.
Thanks for pointing the above out.
Customer reply replied 1 year ago
62;These would be done by filing quarterly 941
Instead of quarterly (4 quarters), how about showing a salary in just the last quarter?
>respective state payroll tax returns.
For example, Illinois Unemployment tax return filing requires both an account number and unemployment rate by filing UI-1 form through the Illinois TaxNet​ website. For past years, because of ignorance of the S-corp, nothing was done by the taxpayer.
Customer reply replied 1 year ago
I can post another question for you if you have experience in S-corp late filing penalty defense.
The company should not disguise distributions by posting to loan receivable.
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You are required to file quarterly payroll tax trusts even
If the payroll is $0 for the quarter.
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Trusts" is supposed to say "returns" above. My apologies.You can ask another directly to my account. You can request it to "mhcpa".
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If you are satisfied with the responses on this question a 5 star rating would be most appreciated.
Brian Michels
Brian Michels, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 207
Experience: Partner at Michels & Hanley CPAs, LLP
Verified
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Brian Michels, Certified Public Accountant (CPA)
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