Is Your Company an S Corp?

On February 3rd, 2011, posted in: Uncategorized by 0 Comment

Many small businesses are single entity S Corporations. Because owners think that “it’s my business, so I can do what I want,” they sometimes make mistakes that can create problems for them with the IRS. When we see this happen, we advise them that they need to think of their business as totally separate from themselves as individuals.

Problem area #1: Officers of an S Corp that work in the business are required to take compensation as salary. Distributions are allowed as well, but salary must be appropriate for the work they are doing and the profits of the business. Dividends may also be taken from the business.

Problem area #2: Owners pay personal expenses from their business account. If this happens, the IRS will treat those transactions as unreported payrolls, not owner distributions. That will mean that the payroll reports are now incorrect, payroll taxes are delinquent, and penalties and interest will be charged.

These two areas are the two biggest mistakes that get S Corp owners in trouble with the IRS. Some cities, like Phoenix, have groups of IRS agents that are specifically looking for these transgressions. Do it right: know the rules and follow the rules.

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