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  • 1.  S Corp Compensation Timing

    Posted 11-28-2023 02:41 PM

    Hey All,

    I have a client in the real estate industry that says he has colleagues with CPAs who run payroll only at the end of the year - take distributions throughout the year and only take a W2 on paper and pay all payroll taxes at year end. Is this acceptable to do? Being that his income comes in waves, it makes it easier on the client. I currently have him running payroll on a monthly basis but he wants to switch to annual per his "peers advice from his CPA."

    My thinking was that if you are taking draws, you then cannot reclass it to net payroll after the fact unless you do that at minimum quarterly because then you're failing to pay and file payroll tax for that Q. Is it reasonable to do zero payroll throughout the year and file all zeroes for quarterly 941s and state for Q1-Q3, and then doing all the payroll year end for paper use (pay all taxes at year end as well)?

    I feel like at minimum, payroll taxes have to get paid prorated throughout the year so I am a little eerie on doing this but in their industry it's apparently "common practice" and their CPAs are even giving lectures on it to the realtors but it doesn't meet the smell test for me. I don't really see the purpose being that you would still need to pay the estimated taxes quarterly, based on his P&L, so if taking a year end salary, would then reduce his P&L and he'd be overpaying the entire year and then paying double tax at year end when taking the salary so what's the point? Thoughts?



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    Matthew R. Savello, CPA
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  • 2.  RE: S Corp Compensation Timing

    Silver Most Valuable Member
    Posted 11-29-2023 07:42 AM
    Your smell test is correct.  Yes, there are accountants who report no payroll throughout the year until the very end of the year.  From my experience, this is done by accountants who are either overwhelmed or lazy and then cram it in at the last minute.  First, if client takes out money during the year, they should report salary during the year.  Second, what starts out as a good idea can go south real fast if something comes up and client doesn't have tax deposit money at year end.  Similar to not paying estimates and paying it all at the end.  There is a reason the IRS doesn't allow this method.  Besides government cash flow, many taxpayers would end up in trouble as they don't set aside proper funds.  Third, if IRS or NYS should look at this closely, you are left holding the bag as you will certainly be blamed in some way and subject to penalties and worse.  Fourth, you will have to file payroll tax returns for those NO PAYROLL quarters anyway, so why not report something reasonable all along and then just report a higher amount in the 4th quarter.  

    Both IRS and NYS know some small companies report payroll this way.  Better to start off doing things the right way or the better way and avoid trouble.

    --
    Larry Prosky CPA
    Prosky & Rosenfeld LLP CPAs
    1025 Old Country Road
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    Fax: 516-873-9602
    Cell (Text) 516-661-6020
    Other: 516-785-5658
    e-mail: larry@prcpallp.com


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