Undo all of the payroll and hope payroll tax refunds come quickly?  One cannot employ oneself.  If they had formed the LLC you would likely qualify for a late S election but if they didn't form a separate entity they are just a self-employed Sch C filer.

And if they can't follow the original instructions you gave them, they aren't going to be able to keep corporate books and records for an S Corp return so I think I'd drop that idea. 

My two cents.

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@lillyjohnson wrote:

never completed the formation or S-Election. How should I handle this on the 2022 return?

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Did they INTEND to be taxed as a S-corporation at the beginning of the year AND have "reasonable cause" for not filing the election on time?

I sure hope there are no "real" employees harmed in this process.

They intended to be taxed as an S-Corp, but never signed the documents ready at the attorney's office to file the formation.

How would we undo the payroll? The owner already received a W2 and all payroll taxes have been filed and paid. File amendement for those? Or pull it out of the owner distributions?

Start here:

https://www.irs.gov/businesses/small-businesses-self-employed/correcting-employment-taxes

There are two ways to handle this. One is that the Gross Payroll is Draw, which means all of the refunds go back to this owner when the business gets the refund checks. The other way is to treat the employer share of taxes as refunded against the expense entries, and only the employee share is returned (which means Gross Wages is changed to draw).

The point is to no longer have anything as expense, because it isn't expense, for purposes of this category.

This is fairly generic advice, of course, and overlooking nuance, such as FEIN, insurance, State, and other mistaken issues for not being an S Corp. And overlooking whether that even is advised.