Accounting & Bookkeeping & Small Business Forum

[Guest]

I just lost a S Corp Client. I have worked with him, last 6 months and he was very happy with my service. His previous accountant did not look over his quickbooks data or bank statement. I audited his quickbooks data and found many personal expenses on his S Corp business account. He was not happy with that, but agreed with me to take out personal expenses and make necessary adjustment. In December bank statement I found $500 check from his business account to a jewelry shop. Well, I had to adjust that and told him either to put that money back or charge to his payroll. He decide to pass it through his payroll. He did the payroll himself with quickbooks payroll service. At the end of 2003, he asked me to look over all the payroll data. I found out, his W2 was short by $4,000 in payroll taxes, which he should have paid but he did not. We analyzed how this happened. As per his previous accountant's advice to save money on SS and Medicare he took out a low salary once a month and a high dividend every month. He also passed the dividend through payroll as a monthly bonus. So, his tax liablity on low annual salary was ok, but his W2 added the Bonus(disguised as dividend) to his payroll report and it increased his payroll tax liability. I asked for the documentation to declare monthly dividend, (IRS only allows quaterly dividend distribution to S Corp shareholders)which he did not had, I also asked him, to issue himself a 1099 Div to report that (bonus/dividend) income and explained that this Dividend is taxed twice, once as a S Corp Income and Again as a Dividend Income to Shareholder. He was very upset with my explanation. But I laid down everything, what he needed to do to correct this dividend/bonus fiasco. He went back to his Old Accountant (CPA) to discuss my discovery. They told him, the dividned he took is a expense of the company and not a income to him. So, he will have to pay taxes only on the low annual salary and he does not have any more payroll tax liability. I do not know what his CPA's were drinking, but I went through all the IRS rules regarding dividend of S Corp, and I could not find anywhere that a dividend is a expense of the S Corp and also of the shareholder.

Anyway, he decided to work with his Old Accountant who does not care about his mistakes in accounting or running personal expenses through business.

So, its not fare to blame the dishonest clients, there are also dishonest accountants who says client is always right, as long as they get there money.

[Guest]

Personal expenses should go to a Draw account.
Owners payroll should be to a Draw account.
S Corps. are simular to a sole prop. or partnership or LLC, (LLC can have a sole owner) if two or more owners are involved. They pay income tax on profit thru k-1 (partnership form 1065, etc).
C corps. are different. Income is past to shareholders thought dividends.
Hope this helps. This is the way I've it for years if I am wrong the CPA doing the audit would have corrected the error.

[Guest]

You REALLY do not understand S-corp taxation and should not be advising clients.

First of all, S-corps do not pay dividends to shareholdes unless they are distributing acumulated earnings and profits from when they were a C Corp.

He can take a reasonable salary, and further shareholder profits (NOT dividends, but often incorrectly called that) are taxed, whether distributed or not, via the ordinary income line of K-1S.

Why on earth would you run his "dividend" distributions through payroll, and ALSO tax them through 1099-DIV. This double taxes the money, and is completely incorrect.