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Posted by Harlan Lunsford on December 7, 2006, 8:49 am
Please log in for more thread options Josh wrote:
> kimshapiro100@yahoo.com wrote:
>> urgent...payroll tax issue
>> *******************************
>> My friend started a tiny business in Jan 2006. She got an
>> investor to put a small amount of money. It is a C Corp in
>> California.
>>
>> She was supposed to be an employee with a salary. She was
>> so busy ..being a one woman show..that she did not take a
>> salary. She just drew an amount of money every month.
>>
>> Now she is trying to get her act together...and get herself
>> to be paid like an employee and rectify her mistakes of the
>> whole year.
>>
>> What does she have to do to rectify this situation ?
>>
>> What forms?
>>
>> Any penalties?
>>
>> Is it very complicated?
> 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
> 1040, because she has had no withholding from these salary
> payments all year, she is likely to have a huge income tax
> burden.
>
> 2. 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.
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
19th century.
ChEAr$,
Harlan Lunsford, EA n LA
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