Sign Up

Why sign in to the Community?

  • Submit a question
  • Check your notifications
or and start working on your taxes
cancel
Showing results for 
Search instead for 
Did you mean: 
emtiazahmed
New Member

Do I need to run payroll for single-owner S-Corp in California if its not making any money? Or I am only required to do so when I am profitable?

 
1 Reply
Critter
Level 15

Do I need to run payroll for single-owner S-Corp in California if its not making any money? Or I am only required to do so when I am profitable?

If you are not making a profit then in an audit  the IRS will want to know if you have the intent to make a profit and the steps you are taking to become profitable.  Why do you keep the business open if you keep having to feed it with personal funds or incurring more debt.  Are you running at an artificial/paper loss due to depreciation or the 179 deduction.... do you take draws from the business at all.  

An S-corp can make distributions, but the rules are complex.

This article has a reasonably clear discussion of what is required:

http://www.aicpa.org/Publications/TaxAdviser/2014/January/Pages/Nitti_jan2014.aspx

Also see the following IRS discussion: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Stock-and-Debt-Basis

 

The IRS position is that an S-Corporation MUST pay a reasonable compensation to an officer before non-wage distributions may be made. The reason is that they feel that non-wage distributions when no wages are paid is an avoidance of social security taxes. From the IRS website at http://www.irs.gov/businesses/small/article/0,,id=203100,00.html :

"Reasonable Compensation

S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.

Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for the service rendered to the corporation.

Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense and subject to employment taxes."

The page cites Joly vs. Commissioner, 211 F.3d 1269 (6th Cir., 2000) as one judicial finding on the IRS's authority to reclassify distributions to wages subject to employment taxes. Factors to determine reasonable compensation are given in the ruling.

The AICPA has an interesting article on this topic here: http://www.aicpa.org/publications/taxadviser/2011/august/pages/nitti_aug2011.aspx

You also might want to read a lively discussion on the Tax Almanac website here: http://www.taxalmanac.org/index.php/Discussion_Forum_-_Tax_Questions . The substance of the discussion seems to be that taking a reasonable salary is not optional and, if you took distributions with no salary, the distributions should be changed to salary with appropriate employment tax returns being filed (late, if necessary.)

The fastest way to get audited as an S-Corporation is to not report wages to officers on page 1 of the return.


Privacy Settings
v