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Converting past S Corp wages to dividends. Opinions needed if IRS will allow? es330td 11-17-2006
Posted by es330td on November 17, 2006, 11:11 pm
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 (Disclaimer: I know I tried to do too much by myself with
too little information. If I am just stuck I understand
that is the price I pay for not getting more advice.)

Back in 2002 a friend and I incorporated a small
programming/computer consulting business and filed the S
corp election in Texas.

As we would make money we would simply write ourselves
checks from the corporate bank account, splitting income
50/50. On a quarterly basis we were required to report
payments made to employees to the Texas Workforce
Commission, which we did and reported all the money we had
distributed to ourselves. We did this lacking knowledge of
the difference between wages and distributions/dividends.
In filing the '03 and '04 941 forms we reported the amounts
we had reported to TWC and in doing so generated tax
liabilities for SS, FICA withholding.

Never at any time did we tell an employee (myself and my
partner were the only employees the company ever had) that
we had withheld anything and when W-2's were generated the
amounts shown for the various amounts withheld were zero so
we ended up paying these taxes ourselves on our 1040's.

I have verified with TWC that they will let me go back and
decrease the amounts reported as wages to them as the monies
given to the two owners were handled as dividends, not
salaries.

I am then hoping to file a correction with the IRS to get
the wages reclassified as dividends. I realize that this
will require me and my partner to file revised 1040's for
'03 and '04.

As tax was paid by us on the monies distributed the only
"loss" the IRS would be looking at would be the 6.2%
employer matching SS taxes and the amount for the two tax
years would be around $1000.

I recognize that doing this will essentially require me to
refile almost every form for 2003 and 2004 as this impacts
W-2s, W-3s, 1099-DIVs, K-1's, 1120S, 940 and 941 plus our
personal 1040's. What I don't know is if I will be allowed
to by the IRS to do it.

Any opinions or experiences?

Thanks for your unofficial advice.

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Posted by Brew1 on November 18, 2006, 11:48 pm
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 The IRS requires "adequate compensation" for your work to be
paid in wages. Otherwise, most S-corps would do what you
are attempting. Profit over and above that can be in the
form of distributions.

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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Posted by es330td on November 19, 2006, 10:14 pm
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Brew1 wrote:

> The IRS requires "adequate compensation" for your work to be
> paid in wages. Otherwise, most S-corps would do what you
> are attempting. Profit over and above that can be in the
> form of distributions.

Thanks for your response.

I had heard this before and I knew this. I hadn't intended
to zero out the W-2 wages, just reduce them so that 100% of
the monies earned aren't reported as salary vs.
distributions. The question I have is whether anyone thinks
the IRS will reject it if I file correction documents
showing the modified amounts.

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Mark Wiley on November 23, 2006, 1:53 am
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> Brew1 wrote:

>> The IRS requires "adequate compensation" for your work to be
>> paid in wages. Otherwise, most S-corps would do what you
>> are attempting. Profit over and above that can be in the
>> form of distributions.

> Thanks for your response.
>
> I had heard this before and I knew this. I hadn't intended
> to zero out the W-2 wages, just reduce them so that 100% of
> the monies earned aren't reported as salary vs.
> distributions. The question I have is whether anyone thinks
> the IRS will reject it if I file correction documents
> showing the modified amounts.

From the sounds of it, you and you're partner have managed
to screw things up pretty good. The best advice I can give
you is too let a professional handle it, call a CPA and let
him get this done for you, or you could be looking at even
more headaches

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Gil Faver on November 24, 2006, 2:08 am
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> Brew1 wrote:

>> The IRS requires "adequate compensation" for your work to be
>> paid in wages. Otherwise, most S-corps would do what you
>> are attempting. Profit over and above that can be in the
>> form of distributions.

> Thanks for your response.
>
> I had heard this before and I knew this. I hadn't intended
> to zero out the W-2 wages, just reduce them so that 100% of
> the monies earned aren't reported as salary vs.
> distributions. The question I have is whether anyone thinks
> the IRS will reject it if I file correction documents
> showing the modified amounts.

out of curiosity, how much in federal tax savings do you
expect to achieve?

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

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