Really? Another S Corp "No Payroll" thread?

Technical topics regarding tax preparation.
#1
Posts:
2612
Joined:
24-Jan-2019 2:16pm
Location:
North Shore, Oahu
Despite my threats of consequences and disengagement, the client has been ineffective at communicating his net profit to me in a timely manner and we have not run any payroll this year.

I suspect he has profits and distributions.

I just don't want to fire this client.

My problem is, I have always quickly fired or refused these clients in the past, and I have no experience with resolution in these cases.

I am certainly not willing to prepare his 1120s with $150,000 of net profit (and distributions) and no payroll (this subject has already been beaten to death by our group - I'm not doing it).

If I finally get a 2022 P&L from him in June of 2023, for example, can I just run an appropriately-sized late December 2022 payroll and let the late penalty letters come in for him to pay for his non-compliance? Is this a reasonable solution?
 

#2
Posts:
1199
Joined:
3-Sep-2021 4:01pm
Location:
OH
ItDepends wrote:I suspect he has profits and distributions.


Yes, yes he does, which is why he doesn't want to contact you

ItDepends wrote:I just don't want to fire this client.


Sounds like you should, but you're being merciful.

ItDepends wrote:I am certainly not willing to prepare his 1120s with $150,000 of net profit (and distributions) and no payroll (this subject has already been beaten to death by our group - I'm not doing it).


Nor should you subject yourself to the penalties for filing an S Corp return without reasonable compensation

ItDepends wrote:If I finally get a 2022 P&L from him in June of 2023, for example, can I just run an appropriately-sized late December 2022 payroll and let the late penalty letters come in for him to pay for his non-compliance? Is this a reasonable solution?


How are you going to run payroll after the fact? If no 941's are filed, then how would you file an amended return? The penalties for late tax deposits are pretty high relatively speaking.


I think you'd be better off sending this guy away....
 

#3
JR1  
Posts:
6044
Joined:
21-Apr-2014 9:31am
Location:
Western 'burbs of Chicago
Yeah, put on your sad puppy dog face and say bye bye. UNLESS he's willing to let you run payrolls for him.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#4
Posts:
2612
Joined:
24-Jan-2019 2:16pm
Location:
North Shore, Oahu
[[perfect - thank you both]]

I run his payroll, yes (but I don't know how much to run, of course).

I suppose this opens a can of worms with the need for an amended Q4 941.

Sigh

I wonder if, with his permission, I can just run a $50K payroll, which I feel is legitimately reasonable for what he does.

His tax deposit will be $10K however, which will likely be late. He gets a letter (that's the price he pays) - but no amended payroll returns.

Or maybe $16K, $16K, $16K through the end of the year.
Last edited by ItDepends on 12-Oct-2022 3:10pm, edited 1 time in total.
 

#5
Posts:
1199
Joined:
3-Sep-2021 4:01pm
Location:
OH
With permission, yes. Without permission, don't do it.
 

#6
Posts:
8158
Joined:
4-Mar-2018 9:03pm
Location:
The Office
There are two types of clients who shouldn't be in an S Corp. First is those for whom the cost-benefit is negative. The second group is those who just aren't disciplined enough to run payroll for reasonable comp, or cooperate to achieve that purpose.

Your client appears to fall into the latter category. At the end of the day we shouldn't care more about a client's tax compliance than they do.

I vote let him go. From what I've read of your posts, you're not hurting for business. Letting him go frees you up for a better client.
 

#7
Posts:
2612
Joined:
24-Jan-2019 2:16pm
Location:
North Shore, Oahu
sigh.....you are all dragging the truth out of me with your darn reasonableness......

This client is an actor, musician, and the proprietor of the biggest sound engineering service in the state. He's a nice guy, his wife also has an s corp and has been my client for many years, his parents are clients, his relatives are clients. I like them all.

He gets me nearly front row tickets to stadium-level concerts (there it is).

I just don't want to fire him. I wish to help him but to let him pay his penalties for non compliance, while protecting myself, of course.

So now I'm down to:

Run some payroll now (with his permission, of course) and consider if he wants to revoke s status.

Which is helpful, thank you.
 

#8
Posts:
8158
Joined:
4-Mar-2018 9:03pm
Location:
The Office
Put him on autopilot with Gusto or one of the other payroll processors. Some nominal amount each period. Like $100 or $500. The most he can afford to have regularly come out. Then run a bonus each December to true him up to what's reasonable.

If he's not retaining enough cash to run a bonus for reasonable comp you scare the bejesus out of him. Tell him that the IRS has made reasonable comp noncompliance a top three priority in the short term, and that making sure there's enough cash to run reasonable comp is his responsibility. Back taxes, penalty and interest are the cost of noncompliance.

Doing that ends the dynamic of you chasing him down regularly and stressing.
 

#9
Posts:
2657
Joined:
28-Apr-2021 7:00am
Location:
FL
I'm having trouble seeing how one could ethically prepare a return based on events which did not happen.

And contrary to #2, I don't see why a preparer would be exposed to penalties for preparing a corporate return which did not include compensation to a sole stockholder for services rendered.

I also don't see a reason to fire such a client if he or she chooses not to pay compensation after being advised to do so.
Steve
 

#10
Posts:
1199
Joined:
3-Sep-2021 4:01pm
Location:
OH
gatortaxguy wrote:I'm having trouble seeing how one could ethically prepare a return based on events which did not happen.

And contrary to #2, I don't see why a preparer would be exposed to penalties for preparing a corporate return which did not include compensation to a sole stockholder for services rendered.

I also don't see a reason to fire such a client if he or she chooses not to pay compensation after being advised to do so.



https://rcreports.com/resources/reasona ... er-penalty

Yes, there are penalties associated with filing an S Corp return without reasonable compensation. Just because people haven't been caught or audited doesn't make it something worth risking.

You're a member of an LLC that elects S status and you provide services to company? Great now you're a SH/EE. You take money out of the S Corp to pay yourself? Great now you need to pay yourself W-2 income. These are established IRS rules.
 

#11
JR1  
Posts:
6044
Joined:
21-Apr-2014 9:31am
Location:
Western 'burbs of Chicago
Can you involve his wife? He's the one that needs to help determine reasonable salary based on one of the comparable salary sites. And then lock it down. You don't care what his profits and distributions are because THEY HAVE NOTHING TO DO WITH THE SALARY! Repeat.

Get that set and you're ok to go....
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#12
Posts:
6043
Joined:
22-Apr-2014 3:06pm
Location:
WA State
JR1 wrote:You don't care what his profits and distributions are because THEY HAVE NOTHING TO DO WITH THE SALARY!


+1
~Captcook
 

#13
BTJig  
Posts:
218
Joined:
29-Sep-2016 9:26am
Location:
Florida
Does he pay someone else to effectively run the day-to-day management and operations of the company?

I had a Psychiatrist who has his 1040 examined. Not my client, I was called in to help by another office. The agent could see zero wages from his wholly-owned S Corp medical practice and all distributions of profit. The agent opened up an exam on the S Corp. Agent reclassified 100% of the distributions he took from the S corp as wages for 2 consecutive years. Turned into a real tax/interest/penalty dumpster fire. He could have put up some defense if he had taken some salary, but he took none, zero, nada. I'd never seen that happen before and it was costly for the Dr. The IRS agent had a special form to calculate all the tax/penalties/interest on those payroll tax forms/deposits that were never filed/made. It's hard to argue the shareholder salary was reasonable when the shareholder took none AND the business was profitable in the years in question.
 

#14
Posts:
8158
Joined:
4-Mar-2018 9:03pm
Location:
The Office
BTJig wrote:It's hard to argue the shareholder salary was reasonable when the shareholder took none AND the business was profitable in the years in question.


I thought the case law indicated business profitability has no bearing on reasonable comp. The sole driver is services provided to the S corp during the year. That is, individuals have gotten into trouble for taking distributions and not salary when the business was in a tax loss position. As they provided services to the S Corp during the year, they should have taken reasonable comp in lieu of 100% distributions. As messed up as that is. It's also a textbook example of a business that should not be an S Corp.
 

#15
Posts:
6043
Joined:
22-Apr-2014 3:06pm
Location:
WA State
ManVsTax wrote:
BTJig wrote:It's hard to argue the shareholder salary was reasonable when the shareholder took none AND the business was profitable in the years in question.


I thought the case law indicated business profitability has no bearing on reasonable comp. The sole driver is services provided to the S corp during the year. That is, individuals have gotten into trouble for taking distributions and not salary when the business was in a tax loss position. As they provided services to the S Corp during the year, they should have taken reasonable comp in lieu of 100% distributions. As messed up as that is. It's also a textbook example of a business that should not be an S Corp.


Indeed it has.
I need to track down that case to have it handy, but what I remember of it was the EE/SH took about $10K in wages and the company had a $5K loss. The IRS recharacterized another $20-30K of wage. Sometimes these cases just seem to have 'bad facts', but that's not what I remember of that one.
~Captcook
 

#16
Posts:
155
Joined:
22-Oct-2014 7:13am
Location:
NC
The article above reads more like an advertisement for a service the RC company wants to provide. He penalty was removed.

I fail to see how a preparer can get fined for something the taxpayer did not do in direct contradiction to advice given.

The return is required to be filed based on what happened.

S Corp owners should be taking reasonable comp. I have a couple like this and I put a substantial amount on Sch C and have then pay in that way. Not correct, but it better than nothing. Convolution this is the H and W are divorcing and are required to split the money in the bank over a set amount at the end of the month.

Yes, they should be a partnership bt they are not.
 

#17
Posts:
1199
Joined:
3-Sep-2021 4:01pm
Location:
OH
I'm not filing an S Corp without officer comp unless it has 3K in revenue and no income
 

#18
sjrcpa  
Posts:
6477
Joined:
23-Apr-2014 5:27pm
Location:
Maryland
Bushmaster wrote:The article above reads more like an advertisement for a service the RC company wants to provide. He penalty was removed.


And there must be facts omitted.
 

#19
Posts:
292
Joined:
14-Jan-2021 4:58pm
Location:
Texas
CaptCook wrote:
JR1 wrote:You don't care what his profits and distributions are because THEY HAVE NOTHING TO DO WITH THE SALARY!


+1


Obviously the IRS recharacterize distributions, but can they impute a salary payment if no payment exists?

For example, unprofitable startup with no payments to any shareholders (salary, distributions, or other), including employee owners, can the IRS just make up a salary payment?
 

#20
Nilodop  
Posts:
18761
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Whether they CAN is, imo, open to discussion. Whether they do so is esy - they do not. "The amount of the compensation will never exceed the amount received by the
shareholder either directly or indirectly. However, if cash or property or the right to
receive cash and property did go the shareholder, a salary amount must be determined
and the level of salary must be reasonable and appropriate."

-IRS Fact Sheet 2008-25
 

Next

Return to Taxation



Who is online

Users browsing this forum: Anderly, DaleGMac14, exao, FiguredBasis, Google Adsense [Bot], GRobCPA, IDunnoItDepends, JoJoCPA, JR1, ManVsTax, SALYstrikesagain, Terry Oraha and 214 guests