S-Corp Late Election & running one-time 2020

[ea_rva aka acctgtaxmatters]

My new client is a single member LLC with W2 employees. He thought his prior accountant of many years filed an S-Corp election on his behalf at some point. He is busy guy who just signs his returns and sends money. He would not know that filing a Sch C meant not filing as an S-Corp. He takes a $10,000 draw each month, no paycheck and has approximately 7 employees who he pays through payroll. If we were to run a one time 2020 payroll for him, amend his 941 & 940, pay in the taxes & late penalties, would this set him up to meet the requirements for late election? Also if this is doable is the $120,000 salary enough? His net income after running the $120k salary would be about $500k. Thanks in advance for your input.

[qbteachmt · Accepted solution]

You didn't really explain why this matters.

There has not been payroll for this person all this time, so the filing of Sched C or not, isn't the only clue he would have that he was not operating as an S corp all this time.

Why not start with 2021?

[PATAX]

@qbteachmt I agree with you qb... Maybe we are biased but it always seems interesting to me when someone wants to blame their accountant for something that did or did not happen for YEARS.....

[ea_rva aka acctgtaxmatters]

Sounds like a better plan to start in 2021. Is there a benchmark for what an owner's salary should be in comparison to profit for S-Corp?

[PATAX]

@ea_rva aka acctgtaxmatters I am not sure if there is a formal Benchmark or not... A lot of factors could come into play including the type of industry or profession the individual is in... You have to be careful because the IRS does audit S corporations that it deems is paying too low of a salary to the owner or owners... Just my opinion...

[PATAX]

@qbteachmt also could another clue be that all these years whenever and wherever the business name was used that it never ended in "Inc." or "Corporation"?

[ea_rva aka acctgtaxmatters]

Thank you both!

[qbteachmt]

A good reference is the BLS rates for "reasonable compensation" for that type of business in that region. Another metric will be the amount of wages relative to distributions. If the IRS were to come looking, and distributions are multiples of that person's payroll, they would likely determine the person's wages are too low for the specifics of that business.

I have watched webinars from:

https://rcreports.com/

And found them very succinct and helpful.