Set up as an S-Corp but I have not made any W-2’s for myself

[kshell]

The “professional” who set up my business as an S-Corporation told us that since I do not have any employees I do not have to have a W-2: I am the sole employee. It was explained to me that the profit from my business each year is brought over to our personal taxes and is listed as extra income and is taxed as such. I believed them, because I had no reason not to and it is right there on my taxes for me to see. They have been very helpful with everything from finances to taxes and I trusted them. However, I know now that this is not correct. What do I do? We’re talking a few years of no W-2’s. I have no idea who to contact or how to fix this. Any advice is appreciated.

 

[sfender]

@kshell You will need to use a payroll provider when you are an S corp. something like Gusto, ADP, QBO, etc.

As you get that set up - you will need to register as an employer in your state with the unemployment office, DOR, and any other entities. I would just google “how to be an employer in X state”

Additionally you will have to pay yourself a “reasonable salary” so you can’t make minimum wage and take it all in distributions which are taxed at about half of the rate. More info on this via Google. On your W2 you will obviously have to have deductions for everything based on your local , fed, and state rates.

Might be worth meeting with a second CPA to ensure you properly set this up

 

[kshell]

@sfender Thank you. This is very helpful. I am in the process of finding another CPA.

 

[theistnightmare]

@sfender What you mean distributions are taxed at half the rate?

 

[steve126]

@theistnightmare you don't pay self employment or payroll taxes

 

[kshell]

@family1stdad I did not pay any social security or Medicare through the business because I technically never paid myself a salary like I am supposed to. I know this now. The total profit for each year of business was included as additional income on our personal taxes. They told me this is okay after questioning it because I am the only employee and the profit rolls over to my personal taxes and is taxed that way regardless of a salary but after doing my own research that seems to be totally wrong.

 

[family1stdad]

@kshell You are right, this was handled wrong. You can't legally skip out on the social security and medicare taxes totally. How much profit did the business have each year, roughly?

 

[kshell]

@family1stdad Only about $5,000 profit per year. So very little. I personally don’t think that this should be an S-Corporation to begin with. They set it up this way to help on our personal taxes. I guess that should have been the first red flag.

 

[family1stdad]

@kshell They sound like hot messes. A S corp on that level of income was crazy talk. Did they charge you a lot of money to set this up?

The good news, the unpaid taxes aren't that much. You could take the gamble of just doing payroll going forward, and leaving the past years as they were

 

[steve126]

@family1stdad If the profit was reported as income on the personal tax filing, they likely paid for it already, and just paid more than they could've gotten away with

 

[family1stdad]

@steve126 No, they would have only paid income tax, not any of the social security and Medicare taxes, and they likely took the QBI deduction, which they should not have. Paying less tax then if this was done any of the correct ways. S corps increase, not decrease, income tax.

 

[steve126]

@family1stdad What makes you think they’d have done the QBI deduction if they didn’t file anything else? Lol

 

[family1stdad]

@steve126 They just skipped the payroll aspect; they did everything else. Just because they told OP not to do payroll doesn't mean they skipped anything else.

 

[steve126]

@family1stdad Fair enough. Either way it’s a mess until he sorts it out lol. New CPA for sure though

 

[kshell]

@family1stdad The sad part is that they have been in business as a CPA and a tax professional for over 30 years. The reason why I even started going down this rabbit hole was because a friend of mine is in the same boat with these people. Same exact issues. Same questions being answered the same way and we now know that it’s all wrong based on our own research. So we’ve been going through all of our taxes on our own as well as our records to make sure that what we have is the same as what they’ve put on our taxes and thankfully it is but the whole situation is sad. You pay good money to people who you think you can trust but you end up in a total mess.

 

[steve126]

@kshell Rough rule of thumb is that you want at least 100k in "business income" for it to be "worth it" but that is a rough rule, as i said. I don't think you're in trouble, from an IRS perspective, because you've likely paid taxes on profits personally. BUT you are likely defeating the entire purpose of the S Corp, which is to avoid full taxes on disbursements. So if you pay yourself 70k as an employee, that is taxed normal, and then you take the 30k and it's taxed at something like 15.3% or whatever. You still pay taxes on it, but it's not the 38% you'd normally owe.

 

[simonpeter111]

@kshell You need to find a CPA who can help you with this. As for electing S-Corp status, the IRS requires you to pay yourself a "reasonable salary" as a W-2 employee. Anything you pay yourself as a distribution on top of your W-2 salary is not subject to the self-employment tax, which is where the tax breaks occur.

If you need a payroll service provider, I strongly recommend Gusto. I'm a Gusto partner, if you sign up using my partner link you'll receive a $100 Visa gift card. https://gusto.com/i/david51490