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California & Profit Sharing Payout Delay

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dunyay

Junior Member
A friend of mine works for a privately owned company in California whose annual profit sharing is paid out with a certain dollar amount per each share an employee owns, after the end of the calendar year. Though I do not know the specifics of payout time, how they report company profits or if they have an actual policy laid out in a company handbook, this year the employees have not yet received their profit sharing, yet they are required by law to declare the profit sharing on their 2006 tax return and pay the taxes on it. They have been told that they will receive their K-9 (?) statement on April 15, and at best, may receive a check that covers the taxes due on their profit sharing, but that the rest would come at a later undetermined date. I may not know all the details but this sounds highly suspect to me. This is the second delay the company has announced this year. My friend has to file an extension on her tax return, because she won't get all her documentation in time to file her taxes.

1) has anyone heard of such a situation before?
2) is there a state legal requirement for how profit sharing is distributed if in the past it was distributed as one check for the entire year?
3) can they legally delay payment if they say they need the income for other company purposes?
 


pattytx

Senior Member
A friend of mine works for a privately owned company in California whose annual profit sharing is paid out with a certain dollar amount per each share an employee owns, after the end of the calendar year. Though I do not know the specifics of payout time, how they report company profits or if they have an actual policy laid out in a company handbook, this year the employees have not yet received their profit sharing, yet they are required by law to declare the profit sharing on their 2006 tax return and pay the taxes on it. They have been told that they will receive their K-9 (?) statement on April 15, and at best, may receive a check that covers the taxes due on their profit sharing, but that the rest would come at a later undetermined date. I may not know all the details but this sounds highly suspect to me. This is the second delay the company has announced this year. My friend has to file an extension on her tax return, because she won't get all her documentation in time to file her taxes.

1) has anyone heard of such a situation before?
2) is there a state legal requirement for how profit sharing is distributed if in the past it was distributed as one check for the entire year?
3) can they legally delay payment if they say they need the income for other company purposes?
How can they be required to report it as 2006 income if it's not received in 2006? Is somebody claiming because of "constructive receipt"?
 

dunyay

Junior Member
California Profit Sharing Payout Delay

This is in California. I have exactly the same question. The employees have not received their payout, so while the profits were received in 2006 by the company (and presumably being reported to the IRS by the company for 2006), they have not been distributed to the shareholding employees yet. How could employees possibly declare the income or pay taxes on it? I do not know if the company is claiming "constructive receipt" and am not in a position to inquire further about the matter. So I was hoping to get some insight from anyone who is aware of similar situations. Perhaps this is common practice, but it seems highly irregular to me.
 

pattytx

Senior Member
The more I thought about it, I remembered that "Constructive receipt" can actually occur when the funds are "set aside" or otherwise committed AND there is no risk of forfeiture. I don't know if that's the case in this situation or not.

In any case, I would recommend your friend file on time without that income and pay any taxes due (at least pay the taxes calculated at this time). Although there is no penalty for filing late if an extension has been granted (it's not always automatic, but most are granted), there IS a penalty and interest is charged if taxes are not paid in full by the due date, amended return or not, extension or not.
 

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