Reclassifying distributions as payroll

Forum|Forum|6 years ago
May 25, 2020
10 replies
26 views

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.

ProSeries Professional

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T

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.

G

Golfer2016Author

Level 5

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.

T

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

Level 15

What type of entity is the client?

Answers are easy. Questions are hard!

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