urgent ...Tax issue

Has your friend kept a record of the amounts of money she has taken out of the corporation every month? I see two courses of action that she can take assuming she has kept decent records:

1. Assuming the monthly distributions are reasonable, she can still consider the distributions as a salary. Under this route she must prepare a W-2 at year-end like normal that shows the amount of money she has taken. It sounds like she nor the corporation has paid employment taxes on the money. So there are back taxes she must pay. Because employment taxes must be submitted via Form 941 on a regular basis, she is likely going to have penalties for failure to pay those regular payments. Also note that when she does her 2007 Form

1. The second option would be to classify some of the monthly payments as salary and some as a dividend. The benefit of calling some of the money a "dividend" is that employment taxes won't have to be paid on that money and for income taxes it is taxed at a lower rate, assuming it is a "qualified dividend" (see IRS Publication 17 on the IRS website). Note that someone can not avoid employment taxes simply by calling money they are taking from a corporation a "dividend." Congress has given the Secretary of the Treasury (via the IRS) the right to classify money taken from a corporation as "salary." Especially if she is the main employee, red flags will be raised if she is taking money out of the corporpation yet has no salary income on her W-2. The requirement for how much must be dictated as salary has a standard of being what is "reasonable" for the industry the corporation is in. It sounds like no matter what route your friend takes she is in for a heavy tax burden, whether employment taxes, income taxes, or both. There are exceptions to this and so it would be wise for her to sit down with a tax professional that can look at her individual circumstance. For example, if the corporation was operating at a loss, what I have written above might not apply. Hope this helps, Josh

I'm not a CPA, nor do I play one on TV, but what's wrong with this scenario?

a) Classify the existing distributions as a loan from the corporation.

b) Pay employee in December a whopping salary, properly withholding SS, Medicare, employment taxes, Fed income tax + EDD stuff

c) Employee uses the proceeds to pay off the corporate loan.

d) File last quarter 941 on Jan 15 2007 as would be normal were one simply to have started payroll in 4Qtr '06.

e) Set a reasonable salary for next year & carry on filing as normal.

There's no need for any penalty here now is there? She'll just have to get busy registering with EDD and getting all the employment blurb stuff from the web before the end of the year.

Actually, I thought your proposals, rife with talk of penalties and "red flags" quite alarmist. Why frighten the poor woman?

Moderator: I thought it was mild! This is December and it needs to be now or else.

I agree that things need to be done now, but Josh's #1 would have the poor woman simply preparing a W-2 showing no withholding and ignoring the December deadline altogether. Wouldn't this then subject her (as employee) to interest charges and possible penalties for not making estimated tax payments on her 1040? And her corporation to "failure to file" 941's, interest and penalty for not withholding and transmitting federal tax payments, and possible civil and criminal sanction for defrauding the social security trust fund? And that's just the fun the feds will have. EDD will likely have a field day too! Sounds alarmist (and completely unnecessary) to me. But then I'm not a CPA. Perhaps you guys don't get alarmed by any of this. The poor woman is in the first year of her business. I don't know about you, but advice like that would have caused me to abandon my business and run screaming into the hills!

Tony's idea is another route I didn't think of. She could consider the money taken out of the corporation as a loan. She will have to repay this to the corporation. When she repays it, for example in December, the corporation can then turn around and pay out a salary in the same amount. Because the salary is all paid out in December, there will be no past penalties for not filing quarterly payroll taxes. Those payroll taxes can all be sent in this month. This route will also save having to do a lot of past paperwork. The income and employment tax burden will still be the sme however. Note that if she never intends to pay back the loan, the Code prevents it as being classified as a "loan" on the Corp's taxes and she must take it into income on her 1040. And in that case we would be back to page one. The Code requires a clear indications that it is a loan with the intent of being paid back. For example, there must be a stated interest rate, a stated payback period, and so on. What is a loan and what isn't has volumes of complicated case law lurking in the background. But in summary, she must have the intent of paying back the loan. I still recommend she sits down with a tax professional so that she can get tax planning that is catered to her individual cirsumstances. There isn't a one-fit-all solution here. Josh

Naw..... Classify all "draws" as officer receivable and then in December wipe most of it out with an annual salary check. No law says that a salary must be paid weekly, monthly, etc. In fact I think next year I'm just going to wait till December to record my payroll. By the by, annual is the method formerly used to pay English army officers in the

Tony has the gist of it methinks. There are accountants out there who get all up tight when.... aww, nevermind. IOW, this isn't rocket science.

ChEAr$, Harlan Lunsford, EA n LA

Harlan Lunsford wrote, in part:

Cynic that I am, the thought occurs that under that policy, they would have had to pay only those officers who survived the particular year's battles. Bill

Depends on the state. Here in NV employees must be paid at least twice a month unless special exception is made (NRS

If she is really "small", so that the loan is never larger than $10K, I think this counts a "de minimus" and no interest needs be paid. Isn't that right? Otherwise, the interest rate ought to be "reasonable" in case anyone questions it. Having corporate minutes documenting the loan prior to any draw wouldn't be a bad idea either.

I always remember the words of my CPA-mentor when setting up my businesses. You guys will hate this, but here goes. "No one is 100% honest", he'd say. "Lets be 98% honest and see how far that gets us". Here, hidden in that 2%, are the post-dated corporate minutes and the cavalier distribution of the funds in the first place. But with no requirement to file a return on the loan, its between her and God, who will no doubt be far more forgiving than the EDD.

tc

That's exactly what I do in my single-employee C corp (minus the draws of course) I lay myself when I have money, which means perhaps no paycheck in January or February, then quarterly unless the company is flush and pays more frequently and then a check on the last business day in December to finish off the year.

The OP also needs to pay off any company credit card bills and make sure that she doesn't leave more money as "profit" sitting in the company bank account than necessary.

-- Vic Roberts Replace xxx with vdr in e-mail address.

By the by, annual is the method formerly used to pay English army officers in the 19th century.

Yes, but in those days, the officers purchased their commissions. In other words, the officers were independently wealthy and did not require the salary for living expenses. Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Good to know that, Tony. So I will amend to say: "No federal law says......" ChEAr$, Harlan

Hadn't thought of it that way, but by Jove! I think you're right. I inquired at the British army records office at Kew some years back, seeking to find record of any Lunsfords who had been members of the army back during the Revolutionary War. And since I indicated to the steward that these five brothers had deserted while in North Carolina his reply was that "in that case their names were stricken from the rolls, and no mention will you find." ChEAr$, Harlan

Sorry folks. That should have read PAY myself. The L is after all right next to the P on my keyboard.

-- Vic Roberts Replace xxx with vdr in e-mail address.

If the employee is the owner then I would expect that it would be easy to get agreement :-)

-- Vic Roberts Replace xxx with vdr in e-mail address.

Presumably "lay myself off". Or is your business much more exciting than mine? I'd love to do this, but the terms of our health insurance policy state that it's only available to employees working more than 30 hours/week. So we crank out a check every month to be sure we'd survive an insurance company audit.

Why? Aren't CC balances treated as short-term loans? I was under the impression that CC purchases hit the books on the day you use the card, regardless of whether you are using cash or accrual methods of accounting.

You missed my correction. I meant to say that I pay myself when the company has enough money

We agree that credit card purchases are treated as expenses as soon as they are posted to our account by the credit card company. As to why they should be paid at year end (for a Cash Basis business) I will defer to the pros here. We pay them off because our account says we should. Perhaps he does not trust QuickBooks to put list all those charges as expenses, but I just checked and all unpaid credit card charges show up as expenses on my P&L report.

-- Vic Roberts Replace xxx with vdr in e-mail address.