While working with client on YETP I discovered roughly $750K in distributions to a shareholder-employee that client agreed should really be classified as compensation based on facts and circumstances behind the payments.  My plan was/is to have client declare a bonus before year-end issue a net zero paycheck so that all distributions are properly included in employee's W-2. 

Client uses a PEO for all payroll and benefits processing.  PEO is not a fan of this idea and won't process the bonus because they are the technical employer of record and feel the distributions should have been counted as comp when they were made and now they'll be subject to late deposit penatlies, blah blah blah.   

Just looking for suggestions on how next to proceed.  Determining proper allocation between wages and distributions of S Corp shareholders is not an uncommon issue - I've just never had to deal with a 3rd party payroll processor at the same time.  Any input is appreciated - Merry Christmas!