Handling S Corp with no payroll tax

[drincon]

How should we handle a single S Corp owner that has not paid any payroll tax and only paid himself checks throughout the year as his salary?  

What if we reported it as W2 income and on the personal return entered that amount paid as subject to SE tax?

Ultimately, how do we handle compensation of officers?

[sjrcpa]

The S corp is supposed to file quarterly 941s and deposit the taxes. Also annual 940 and state unemployment reports. He should get a W-2.

[drincon]

What if the business owner failed to do so?

[abctax55 · Accepted solution]

Your client needs to prepare the now delinquent W-2 & payroll forms including state.  AND bear the consequences of the associated penalties & interest. 

THAT's how they learn to play by the rules.  If they refuse to do so, I would refuse to prepare the return.

[TaxMonkey]

The IRS offers no relief provision for S-corp shareholders who fail to take reasonable comp.  I think by probably should.  So the only correct way, is to file late payroll tax returns.

Given the harsh penalties associated with that I have seen several other tax prepares use the following methods:

1) book it as a loan

2) book it as if paid on a 1099-Misc, subject to SE tax

3) Ignore, with or without stern lecture.

[RETaxAcctBrk]

Obviously the S Corp owner is handling this wrong.  But our job is to best resolve the issue and file a return.  I would prepare the return and report all the net income as officer compensation (resulting in $0 net S Corp Income) and report the "officer compensation" as Self Employment on the individual return with no deductions.  In both cases I would disclose the treatment in the tax return.  While not correct, at minimum is get's the FICA and MC tax paid, does not result in any S Corp net income tax benefit, and handles the issue with the exception of a few minor payroll taxes and a lot of payroll tax forms.  The client should sign a disclosre and indemnity agreeement.  I have not been able to find such a case taken to the tax court.  At minimum, it should reduce the penalties for late payment of tax.