es330td wrote:

- quote -

First, S corporations do not pay dividends. You and your
co-owner are taxed on all of your distributive shares of
income from the corporation, regardless of whether it was
distributed to you. I presume you understand that part, and
intended to say that you paid tax on your distributive
shares of income, not on the "monies distributed."

If all of the corporation's gross income arose from personal
services performed by you and your co-owner, it is
appropriate for all, or virtually all, of the excess of
gross income over expenses to be paid to the two of you as
salary, subject to FICA, etc. On the other hand, if part of
the corporation's earnings arise from other sources, such as
the use of equipment owned by the corporation or the
services of other employees, then it would be appropriate
for that proportion of your distributive shares not to be
treated as salary.

Another way to analyze the issue is to consider what you
would have to pay an employee with your skills to perform
the services you perform for the corporation, or what you
would expect as compensation if you were to perform the same
services as an employee for an unrelated entity.

In other words, since this appears to be primarily a
personal service business, it is not likely that there is a
lot to get back. You certainly can file amended
documentation and amended individual income tax returns.
However, the IRS may disallow or reduce your claims for
refund based on its estimate of a reasonable salary for the
services you performed for the corporation. There is no way
you can, or should, get back 100% of the employment taxes
you paid.

In the future you should agree on a reasonable salary for
your services and report it that way. You should be able to
avoid employment taxes on some of your distributive shares
of income -- but not on all of it.

Katie in San Diego

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"es330td" <es330td[at]gmail.com> wrote:
- quote -

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

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"es330td" <es330td[at]gmail.com> wrote:
- quote -

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

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Brew1 wrote:

- quote -

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.

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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.

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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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