Late 941 penalty calculator

[Strongsilence-CPA]

Hi

Client wants to pay a wage to himself for 2021.  He is the sole SH of an Scorp and wants to do a maximum 401K contribution. Do you know of a penalty calculator for late filing of 941s and late payment of payroll deposits?

[rbynaker]

I'm no retirement plan expert, but don't elective deferrals to a 401(k) have to be elected and withheld during the tax year and remitted to the account in a timely manner?  He may be able to do an employER contribution after the fact but I think the employEE elective deferral ship has sailed.

[qbteachmt]

For this: "Client wants to pay a wage to himself for 2021."

Has To Pay. It isn't a Want. Payroll is required for this person. If this entity was operating as an S Corp in 2021, yes, this was overlooked.

Yes, it's too late for 401(k). Or, are you considering Solo 401(k)?

https://directedira.com/2021_solo401k_contribution_deadlines/

[Strongsilence-CPA]

Thank you. Client is aware of the law. 2nd straight year he hasn't paid a wage. *  I appreciate your emphasizing it.

The solo 401k is a good suggestion.

Should they pay the wage today, would it be a 2021 deduction or a 2022 deduction?  Corp is cash-basis.

*This client could be my trainer for me about how I learn to teach the law and make the client adhere to it.  I don't need a client who breaks the law.

[qbteachmt · Accepted solution]

Payroll is a cash-basis event. The FUTA and FICA reporting all use Pay date. Not Pay period, which might be all of last year. But, that also is one of the things IRS examines; dates they took any funds from the business compared to payroll. In essence, the IRS has the right to declare all takings were supposed to be payroll, and that allows them to assess interest and late fees/penalties, because this is considered an attempt to avoid paying taxes, which is not legal.

[Strongsilence-CPA]

thank you.

[Strongsilence-CPA]

"...the right to declare all takings were supposed to be payroll, and that allows them to assess interest and late fees/penalties, because this is considered an attempt to avoid paying taxes, which is not legal."

Wow.  Avoiding taxes is the only reason they are doing this.

I'm using email to document my conversations in case the *hit goes down.  Maybe time for me to call AON Insurance for advice.  Re-read Circ 230 too.

[qbteachmt]

It's a tough lesson for them to learn. I sure hope health insurance is not part of this mess, because that would be on the W2, as well.

"The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation."

The IRS has the authority to reclassify payments made to shareholders from non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense which are subject to employment taxes."

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical...

[Strongsilence-CPA]

Client didn't want to hire the retirement plan consultant I recommended in January.

[qbteachmt]

Oh, hey, this: "didn't want to hire the retirement plan consultant I recommended"

brings up another issue. You don't get to contribute to a wage-related plan, when you don't have wages. You first asked about 401(k), but the Employer establishes the plan and the Employee is the participant.

[Strongsilence-CPA]

Thanks.

I did ask about the 401k.

They chose a SEP-IRA, thinking that the SH of the Scorp got SE income. I had to correct them.

But, I have read that the retirement plan language might have a provision about whether it is allowed for an employer to make a contribution in the case when an employee does not.  I'll go back and re-read it.

[qbteachmt]

From TurboTax: "The maximum your S corp can contribute to your SEP IRA is 25% of your W-2 compensation."

And: "The SECURE Act changed the deadline for a business to establish a qualified retirement plan to the business’ tax filing deadline, including extensions, for the tax year for which it intends to have a plan. This change is effective for 2020 and later taxable years."

There are plan types that allow for employer-only contributions, as a profit-sharing concept.

From the IRS:

https://www.irs.gov/retirement-plans/retirement-plan-faqs-regarding-contributions-s-corporation

These people need a Benefit Plan resource to guide them for 2022. For 2021, you have quite the problem in general for that 1120S.

[qbteachmt]

I should have included this article link:

https://thelink.ascensus.com/articles/2020/4/15/plan-establishment-deadline-changed-by-secure-act

"If an employer establishes a plan for the prior year, can elective deferrals be contributed for that prior plan year?

No. Employees may not defer retroactively into a qualified retirement plan. The rules requiring that elective deferrals be made during a plan year—before being received, in fact—were unaffected by the SECURE Act; therefore, employee elective deferrals must still be contributed on a prospective basis only.

What types of contributions can be made for the prior year?

The plan sponsor may elect to make employer contributions to a defined contribution plan. Depending on the type of plan established, this could include profit sharing contributions or qualified non-elective contributions. If the newly-established plan is instead a pension plan, including a cash balance plan, the plan sponsor may contribute employer contributions to that pension plan. Note that these are all employer—not employee—contributions."

[Strongsilence-CPA]

Hey QB,

A new wrinkle has appeared. The Scorp had an investment in a partnership.  This '2nd tier' k-1 (don't know if that is right) distributed cash but it went to him personally.  The cash distributions didn't go into the top tier S.  I asked him why and he said it was a mistake, so not really genuine in my opinion.

So, that might establish cash paid in 2021.

Can this cash paid be treated as wages paid in 2021?

Obviously creative and I have yet to look for support.

[qbteachmt]

"The Scorp had an investment in a partnership. This '2nd tier' k-1 (don't know if that is right) distributed cash but it went to him personally."

Have you seen that K-1, so that you can see the EIN for the partner?

What he seems to be overlooking is the reason to form a corporation at all. He isn't honoring the separation, that this S Corp is an independent entity from himself. By piercing the corporate veil, he would be putting himself, personal assets, etc, completely exposed financially and legally.

"The cash distributions didn't go into the top tier S."

Someone provided the Partnership with the identification info of the partner. If/when he signed, he would sign as "John Doe, President of S Corp" instead of John Doe.

That's where you start. Confirm the person or the corporation is the partner. That's what the K-1 will confirm or have an error, as well. Then, if the LLC documents it is supposed to be the corporation, and the K-1 is issued to the person, that would be a nominee interest, and the K-1 belongs to the S Corp and gets entered for the S Corp. The 1040 might also have an entry for it with a full offset to show that it belongs to the 1120S (I have not worked through that type of error). It might be that this person is Personally the partner in the LLC, though. You need them to prove all of this and provide that proof to you. And compare what you find to what he states and how he presents it.

"I asked him why and he said it was a mistake, so not really genuine in my opinion."

At some point, if you catch him not stating what you find out, you have to decide to keep him or throw him back into the gene pool.

"So, that might establish cash paid in 2021."

Clearly, it does. What you don't know yet is the true relationship(s) between all the parties.

"Can this cash paid be treated as wages paid in 2021?"

Once you know who it belongs to, you enter that input accordingly. If it turns out to be the S Corp that is in the partnership, then this is no different than any other distribution he took from the S Corp, because it first is an In; then it is an Out (cash flow).

That includes the use of S Corp resources for personal purposes. Examples I see quite often when looking at their details: having the S Corp pay for fuel, repairs, license, insurance, of the personal vehicle. That would be treated as Employee Advance until they turn in a Mileage report for business proof under An Accountable Plan. Then, the mileage rate credit to that employee can offset the amounts "borrowed" from the S Corp. Or, the personal use of a company-owned vehicle (is taxable through payroll). I've seen Spotify and Sirius radio charged on the company credit card, for the personal use. I've seen Hair Cuts, car wash cards, I've seen, "My crew will mow the lawn and landscape at my dentist's building and he takes care of my kids for free." I've seen a construction firm build the owner's log cabin with crew labor and left over job materials. And meals Mon-Fri + Starbucks every day. They think, if I pay for it from the business, that makes it business write off.

You might roll over that rock and find all sorts of creepy-crawlies.