Reclassifying distributions as payroll

[Golfer2016]

Hello,

I have a client who took distributions that really should have been payroll.  She hasn't done payroll before.  Since they were distributions, no tax was withheld, and she didn't file any reports.  This is a very small business.  I have heard about CPAs reclassifying and doing a late W2.  I know this isn't perfect, but can it be done?  I am thinking if she moved over $15,000 as distributions, I could just do a late W2 of $13,000 or so dollars.  the problem is that she also didn't make any unemployment contributions in addition to not withholding or doing any 941.  

[TaxGuyBill]

If it should have been payroll, that is what should be done.  The corporation will need to file and pay the 941s, unemployment and W-2, plus late penalties and interest.

Is there a reason why such a small business is an S-corporation?  At first glance, it seems like that may not be the best option.

[Golfer2016]

she set it up with another accountant.  She may shut it down but it is what it is.  What penalties would she be looking at?  Also, I'm not sure how the state would do it since she doesn't even have an unemployment number yet.

[TaxGuyBill]

I think the late W-2 is in the vicinity of $260, and I don't recall the late penalties for the 941 offhand.   A quick glance at chapter 11 of Publication 15 shows will likely be a 10% penalty (plus interest).  But do more research on that (and be cautious about the Trust Fund penalty).

As for State unemployment, you will probably need to ask the State Unemployment agency.

[George4Tacks]

What type of entity is the client?

[qbteachmt]

"Penalties - It's very important that you complete Part 2 of Form 941 or Form 944, Schedule B (Form 941), or Form 945-A (if filing Form 944) correctly, or it may appear that you didn't deposit your taxes when due. There's a late deposit penalty ranging from 2% to 15% depending on the length of time the deposit is late.

Generally, unless you're eligible to pay taxes with your return, you should have deposited your taxes and shouldn't have a balance due with Form 941 and Form 944. If you pay taxes with your tax return that should have been deposited, you may be subject to a penalty. See Topic No. 757 and Publication 15 for rules on deposits and payment of tax with your return. Be sure to sign and date Form 941 or Form 944 before mailing."

What about any 1099-Misc? That is a worse penalty.

[abctax55]

And be aware that F 940/federal unemployment will now be the full 6.2%. There's no credit if the state unemployment is paid late.

[TaxGuyBill]

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@abctax55 wrote:
And be aware that F 940/federal unemployment will now be the full 6.2%. There's no credit if the state unemployment is paid late.

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Interesting, I didn't know that.  Thanks.

[abctax55]

@TaxGuyBill -  FUTA is 6.2 - the credit of up to 5.6% for state UIC paid timely takes it down to the commonly stated .6%.   The form for working thru it is on page two of the F 940.   It can get a bit complicated when there's more that one state.

PITA....and a trap for the unwary.

And I ass-u-me it's still that way; I haven't run across it in a decade or more.

[qbteachmt]

I'm guessing you folks don't do much payroll  🙂  It's been 6% for many years.

"Until June 30, 2011, the Federal Unemployment Tax Act imposed a tax of 6.2%, which was composed of a permanent rate of 6.0% and a temporary rate of 0.2%, which was passed by Congress in 1976. The temporary rate was extended many times, but it expired on June 30, 2011."

Of course, who knows what will change for 2020 forward...

[abctax55]

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