S-Corp question

[jlcwilliams]

What is the name of your state (only U.S. law)? MN

I have a client that I am for the first time filing this tax return. Typically I do only bookkeeping services, but I want to add tax service. After reviewing his last year tax return, I have a question. He has a S-Corp and from my research and what I know I thought he should have a reasonable payroll. But all he has is distibutions. The income is under 10k. Does anyone have any knowledge of this. From what I can tell he has never a payroll check in the last 10 years.

Any thoughts?? I do have a couple local CPA's I am checking with but I was hoping for a quicker response possibly here.

Thanks!

 

[Antigone*]

What is the name of your state (only U.S. law)? MN

I have a client that I am for the first time filing this tax return. Typically I do only bookkeeping services, but I want to add tax service. After reviewing his last year tax return, I have a question. He has a S-Corp and from my research and what I know I thought he should have a reasonable payroll. But all he has is distibutions. The income is under 10k. Does anyone have any knowledge of this. From what I can tell he has never a payroll check in the last 10 years.

Any thoughts?? I do have a couple local CPA's I am checking with but I was hoping for a quicker response possibly here.

Thanks!

Unless you have a firm understanding of Tax Law, you have no business preparing tax returns.

Google the the term Schedule K1 and that might answer why he doesn't get a paycheck

 

[HappyWanderer]

An S-corp for such a small amount of income is problematical, but, no matter. I believe the code requires a "reasonable salary". One rule of thumb (not the law) is that salary shouldn't be less than distributions. Some use a 60/40 split, but, again, that is just a guess.

 

[LdiJ]

An S-corp for such a small amount of income is problematical, but, no matter. I believe the code requires a "reasonable salary". One rule of thumb (not the law) is that salary shouldn't be less than distributions. Some use a 60/40 split, but, again, that is just a guess.

An S-corp is required to pay working shareholders a "reasonable salary". That reasonable salary includes proper withholding for social security and medicare taxes. With 10k in profits, most likely at least 8k or so should have been paid to the working shareholder as salary. (the remaining 2k to be available for employer taxes and employer expenses).

There is some pretty famous case law on this particular issue that came out of PA. One CPA handled numerous clients with S-corps who all had profits of less than 25k, and none of them paid their working shareholders any salary.

Someone new to tax preparation should NOT handle an S-corp return...and particularly should not handle an S-corp return where there are potential issues.

Had this been a potential new client of mine, I would have suggested, before the end of 2009, that they hook up with a payroll service and at least do a 4th quarter paycheck for the working shareholder that converted any distributions they received into salary, with the proper taxes being withheld and remitted to the IRS...and then with at least monthly, ongoing paychecks for the working shareholder.

Payrolls services deliver a lot of "bang" for their bucks.

 

[HappyWanderer]

That answer is why LdiJ makes me HOT. Listen to her.

 

[jlcwilliams]

Thank you to those who offered positive information. Unfortunetely it was already what I do from the research I have done on my own. I will say I am very dissappointed to those to slammed me. Everyone starts somewhere, well at least I thought and that is all I will say about that.

I have over 15 years of accounting experience, private companies and not directly in tax. But I do have some understanding and I am learning I just haven't become an expert which is why I am reaching out for others that have experience. After a recent lay off I am taking this opportunity grow my bookkeeping practice of which I have been doing on the side for the last 5 years. My plan was to eventually offer tax services for personal and sole props but after seaking refresher courses, etc (although I do my own). This particular person was referred to me through a networking group in my area. At this time I have not committed to preparing his tax return, I will gather all the info needed to do so. I am reviewing his last year's tax return and it is very simplistic to say the least. The question I asked was the only flag that stuck out to me. The actual income was closer to 6k (not that it makes a difference). This person I am referring to has been in business for 10 years and obviously others have prepared his return, so why would this have been addressed years ago is my concern. I have suggested we should do a payroll going forward if he wants to work with me. The previous person he was working with when from a private practice went to work at a firm, and honestly he can not afford their fees, which is why he is looking.

Again thanks for your input. I am sorry for asking.