S Corp Using PEO

[David]

An S Corp with one shareholder/officer is using a Professional Employer Organization (PEO). There are no quarterly employer reports filed by the employer since the PEO files under the PEO's tax ID.

Typically the payroll expenses are reported under a category such as PEO expenses. If the expenses are reported as payroll expenses it may raise a red flag with the IRS as to why no quarterly reports are being filed.

Since this is an S Corp I know it may raise a red flag if officer salaries aren't reported. I am thinking that I will still report officer salaries and then PEO expenses for the other employee wages. In the security questions section I am planning to report 1 as the number of officers with compensation, zero number of employee W-2s issued and no quarterly employer reports. 

How have those of you who have this situation for an S Corp handle it?

Thanks.

 

[Medlin Software, Dennis]

Not a PEO expert...

Unless the shareholder receives no compensation (including benefits), the company does have the shareholder as an employee, needs to pay a reasonable wage, meeting the minimum frequency for the state, file payroll reports, withhold and deposit taxes, etc.

One item is to remember the insurance the company provides or reimburses for the >2% S Corp shareholder is wages, subject to withholding (with a few exceptions, such as SS, Medicare, and FUTA), and should be reported as wages based on constructive receipt (not just at the end of year).  "Insurance" has a wide brush, and per the IRS, also includes WC insurance (if the owner/employee is covered).

As is, per your information, this is low hanging fruit which will be caught easily, and painfully...

[jklcpa]

David, you might find this article from The Tax Advisor somehwat useful:https://www.thetaxadviser.com/issues/2017/nov/liability-payment-employment-taxes-peo.html

I agree with Medlin's post that if the shareholder has compensation, the IRS will be looking for payroll return filings and payments. 

[grandmabee]

What about if the corp. leases its employees from a leasing company.  Would you put the officers wages under "officers wages" or under leased employees?

there will be no payroll reports filed by the corp.

 

[Medlin Software, Dennis]

20 minutes ago, grandmabee said:

What about if the corp. leases its employees from a leasing company.  Would you put the officers wages under "officers wages" or under leased employees?

there will be no payroll reports filed by the corp.

 

>2% shareholders of an S corp are employees if they receive "wages".  "Wages" includes benefits, in addition to the reasonable wage for their efforts...  I have no idea if it would work, but maybe if the S corp had 50+ shareholders, none with more than 2% stake, but I would guess another structure would be better if that were the case...  Or maybe if the corp did not want to deduct any of the shareholder compensation, and neither did the shareholder, but that does not seem likely.

 

 

 

[JohnH]

What about a line item on the “Other Expenses”  Line 19 supporting sheet for “ PEO Outsourcing / Leased Employees” followed by a negative entry for “Officer/Shareholder Wages” on the next line?  Then enter the “Officer/Shareholder Wages” on Line 7 of the 1120S. 

 

[David]

On 3/19/2018 at 12:13 PM, jklcpa said:

David, you might find this article from The Tax Advisor somehwat useful:https://www.thetaxadviser.com/issues/2017/nov/liability-payment-employment-taxes-peo.html

I agree with Medlin's post that if the shareholder has compensation, the IRS will be looking for payroll return filings and payments. 

Thanks Judy for the link. A little scary since every company I know who uses a PEO thinks the PEO is liable. 

But back to my question as to how best to handle the officer's wages since no payroll reports are filed by the company - 

John's solution is similar to how I was planning to handle this - see my original post. Does anyone think that reporting officer's wages on line 7 of form 1120S will be a problem when there are no W-2s or employer reports filed by the company?

Thanks.

[JohnH]

Part of the reason I suggest listing the total paid to the PEO and then backing out the Officer/SH wages is that it discloses the source of the Officer/SH wages.  If the return were flagged for having reported wages without any 941's being filed, and if someone looked at it in a review, they would be able to see where the entry originated. 

[Medlin Software, Dennis]

A Line 7 (1120s) amount indicates there should have been employee processing done. I would not be comfortable preparing their return, given the OP, since no W2 means I have no proof of the Line 7 amount (and I know this is a hot button for the IRS, and can easily be flagged and audited).