S-Corp no payroll salary

[kbrown2858]

I applied for an S-corp in Jan of 2021.  July 15, 2021, I received the S Corp letter.  As the year was half over I didn't put myself (sole proprietor) on payroll (I started payroll Jan 2022).  My question is how does that get filed for taxes this year for the SCorp and personal since I had no salary?

Any and all advice is much apprecaited.

[ThomasM125]

You are required to pay yourself a reasonable salary, based on the amount you withdrew from the business and it's profitability, and also what you would be paid for a similar salary job.

Since you didn't file a W-2 form, a work-around would be to report the salary as self-employment income in TurboTax. That way you will pay in self-employment tax that will account for your social security tax liability.

You would deduct the amount you reported as self-employment income on the S corporation return and report it as officer wages.

You other option would be to issue a W-2 form and complete the payroll tax returns 940 and 941. However, they will be late so will be subject to penalties.

[Mike9241]

I disagree with the SE route.   you are an employee.  employee compensation is reported on w-2.  failure to withhold and pay in those taxes can result in substantial penalties.  your s-corp would also be responsible for filing the Federal UC tax return form 940 which you can't file as  SE. Your state may also have a UC tax.  so now you face additional penalties for failure to pay and file federal and state UC returns and taxes.

it's your choice 

1) the SE route

2) file the returns and forms and get hit with late filing and payment penalties

3) forget about taking any salary or reporting any SE income and hope no issues are raised by the iRS  and/or state

you may want to consult with a tax pro who can give you advice based on the actual numbers.

[kbrown2858]

Thanks, I am contacting a tax pro, but to satisfy my own mind- this is my scenario:

I have 2 clients- one paid $70k to my S Corp EIN, the other paid $170k to my SSN

My question is does it make sense to file SE on the $170k on my personal taxes and then file the late 940s for the S corp?

It looks like I should have started payroll when I filed, not after I received the S corp letter.  Lesson learned

Thanks

[JamesG1]

Yes.  You really wanted to start payroll when you started the S corp and run all payments through the S corp.

Make sure you ask the tax pro whether the late 940's are subject to penalty relief.  See here.  Be advised that any IRS penalty relief does not address local UC penalties.

It is good to know about Penalty Relief Due to First Time Penalty Abatement or Other Administrative Waiver as you go through this process.

@kbrown2858

[Tdbtdb]

so, If I do set payroll any chance I can cut off or eliminate it and make the expenses to the minimum as possible to my S corp ??? or iwhich the taxes penalties?

[JulieS]

Yes, you are allowed to reduce or suspend payroll in this situation. However, you need to be extremely cautious about doing so. 

As ThomasM125 states you are required to pay yourself a reasonable salary on Form W-2, for the work you are doing. Click here to learn more about reasonable compensation. 

The IRS monitors this year by year. If you have a profit and don't pay yourself any salary, you are more likely to get audited, especially if you make distributions to yourself. If that happens, the "penalty" is that the IRS will decide your reasonable salary for you and then you will have to pay the payroll taxes on the amount they deem is wages, as well as penalties and interest for not doing so in the first place. 

Penalties for not paying your payroll taxes vary from 2 to 15% of the tax owed. Penalties for not filing your payroll tax forms range from 5 to 15% of the tax owed. Click here to learn more about penalties and interest.