My Late S-Corp Election was approved in January 2018, too late to file a W-2 for 2017. Is it ok to file a 1099-MISC?

[John41]

I have an LLC, and I filed for an Late S-Corp election for 2017.  It was approved, but in January, after ADP will allow me to file a W-2.  I heard that it is ok to file a 1099 for yourself and list that as Officer Compensation?  

[Rick19744]

A couple of questions:
1) Did you actually pay yourself wages?
2) What was your income level for 2017?
3) Did you make distributions to yourself; not wages but distributions
4) Are you the only employee?
5) I want to understand what you mean by "late S Election".  Is it late because it was approved after 2017 or was the election actually filed late?

[John41]

We are an Arizona LLC, that filed an election to file as an s corp (form 2553).  We filed late and it wasnt approved until january 2018, but it was approved retroactively starting january 1st 2017. I did not pay myself wages, because I was an LLC, so I wasn't supposed to, but now filing as an s-corp, I am required to take a wage, but its 2018 already, and I only took distributions for 2017 (owners draw). There are 3 employees that receive a W2, and the LLC income is about 250k per year.  I use ADP for payroll, and they wont accept reporting wages after 12/31.  I've heard it's "ok" to file a 1099-misc and report is as officers compensation (line 7 on 1120s).  In 2018 I will be taking a wage, so I won't have this issue next year, but the timing didn't work out this year.  Just wondering what the best way to handle this is.

[Rick19744]

You've got a little quagmire here and no real good answer.

• ADP is a little rigid sometimes.  In your example, you could indicate to them that some of your distribution should have been wage and they could amend the forms.  However, they will probably not do that.
• Even if they amended, the taxes would be late and you would be subject to some penalties; not the end of the world.
• I do not recommend issuing yourself a 1099 as that is not the proper reporting mechanism.
• The IRS does scrutinize the S corporation arena where the company is profitable, take a distribution but does not take any wage.
• I would file your return just as it is and how everything occurred.  You may or may not receive a notice.  If you do, then you just respond with the same facts that you presented here; late election for S status, not sure if it would be approved, can't pay wages as an LLC, year end was over once approved retroactively AND the big final piece is that this matter was corrected for 2018.  They should accept that.  It may take a little work (correspondence back and forth or phone calls), but you should be ok in the end.  It may need the involvement of a tax professional at some point to step in on your behalf and work through the redtape.

[SmallBiz2013]

This is interesting because I have a similar issue.  I'm about to starting using a new CPA and I want to ensure he's not steering me wrong.  I'm a single member LLC which was established 01/01/2019 and my (new) CPA is filing a late s-corp election request to be effective 01/01/2019.  Before I connected with this CPA I was on a hunt to find a payroll company that even would file a 2019 payroll since my (old) cpa was "too bogged down" to do my payroll for 2019 (we have since "parted ways").  It took me four tries to find a company who would do a 2019 payroll this late in the game.  So, when I came across this new CPA to do the taxes for 2019 he advised me to stop my 2019 payroll plan with Paychex and not pay any wages to myself in 2019.  That would mean around $150k would go to me as a shareholder distribution wherein, normally, $60,000 would have been payroll.   When I inquired as to the reasoning (and legality) behind this his exact words (email) were,

 "The IRS allows late election S-Corp as far back as 3 years as long as you have the LLC in place.  The requirement that I’ve used with all my clients is starting payroll moving forward and not going back and doing late payroll that will cost late payroll tax filings and penalties.  My experience and relationships with other CPAs is that you start the payroll moving forward and the IRS will not bother you as long as you do it moving forward.  I have done that with dozens of clients who got 3 years of payroll taxes cleared by going back and doing the late-election."

I mean it sounds fantastic but I'm wondering how "normal" this is.  The intent was never to "dodge" payroll taxes for 2019.  My old CPA misinformed me (fired him) about whether or not I could elect an s-corp and so it just never happened.  That said, COVID is hurting me.  All this money we're supposed to get is taking so long to roll in I'm going to have to do something quick.  This tax break could be a huge help but the ends don't justify the means.  I just don't know how normal it is to go, "Well, I wasn't an S-corp last year and it got approved so I'll just do payroll for this year going forward."