QBI and Payroll

[Edsel]

One long-time client made a ton of $$ last year.  He is over the reporting threshold for necessitating payroll and thus stands to lose QBI because he has zero payroll.  He owns a Sub S in construction, and conceivably can create a payroll for 2019 paying himself $128,000 in December.  He would be filing a 941 for the 4th quarter, and will be penalized for late deposit of FICA and state SUTA.  Not sure whether these penalties would offset the benefit, and I sure don't plan to do this free.

As a matter of fact, I'm reluctant to do this to begin with, but would be obligated to save my client $$$ if I can do so ethically.

I can't find it in my research materials, but seems like I remember in a seminar where I was told that for QBI purposes, the amount of payroll would be limited to the payroll reported by January 31.  If this is the case, the above plan would be worthless.

Comments?

 

 

[Medlin Software, Dennis]

Personally, unless there were real payroll actions taken before Dec 31, I would not create a payroll now.

[Lynn EA USTCP in Louisiana]

The payroll W2's must have been timely filed to SSA (i.e. 1/31/2020) for it to qualify for QBI.

 

[Lion EA]

If he's in construction, does he have enough assets that the unadjusted basis will get him a little QBID? Then he can learn his lesson about payroll for 2020.

[DANRVAN]

12 hours ago, Edsel said:

stands to lose QBI because he has zero payroll

and you will prepare inaccurate returns to bail him out?

 

12 hours ago, Edsel said:

I can't find it in my research materials

did you review 199A(b)(4)(A) and 199A(b)(4)(C)?

[DANRVAN]

45 minutes ago, Lynn EA USTCP in Louisiana said:

The payroll W2's must have been timely filed to SSA (i.e. 1/31/2020) for it to qualify for QBI.

 

There is a grace period per  199A(b)(4)(C).

[mircpa]

I would say running payroll late & paying penalty is much better then letting IRS come and re-characterize some K1 income & make him pay SS & medicare taxes. At least now he will learn lesson and start periodic payroll going forward. And payroll has to get start at some point why not now.

[Lee B]

14 hours ago, Edsel said:

One long-time client made a ton of $$ last year. 

 

 

The most troubling thing is your reference to a "long-time client"!

[DANRVAN]

3 hours ago, mircpa said:

least now he will learn lesson

As is see it, the lesson this client will learn is that he can call it whatever he wants in order to get the best tax position from the transaction.  So now 63 days after the year end, it is no longer a social security saving distribution; but a QBID producing reasonable salary, paid on the last day of the year!

You are right, a reclassification is in order, but sounds like this client will only go with whatever gives him the net benefit.

 

[BulldogTom]

Reminds me of the old CPA who said the size of the fee determined the reasonableness of the tax position.   For the right fee, any position can be taken on a tax return.   This is why the IRS commissioner keeps going after professionals, because we whore out our credentials to high paying clients to give them what they want instead of recording the facts on the tax return.

Sorry, I just couldn't keep quite.   It has been a tough day and I am just not willing to hear this crap.   Some day justice will catch up to clients and their preparers who pull this $h1t.   Unfortunately we are rarely ever to witness it.

Judy, if that term is offensive you can edit the post to change it to whatever is the politically correct term for a person who sells their body and respect for money.   I don't know what that word is, so I will just use the one I know.

Tom
Modesto, CA

[Gail in Virginia]

7 hours ago, BulldogTom said:

 

 the politically correct term for a person who sells their body and respect for money.  

I think that is politician. 

[jklcpa]

Tom, no problem here and agree completely with your sentiment. I've made similar statements over the years about some in our profession by saying "prostituting themselves". Same thing. 

[Abby Normal]

Shouldn't he have been doing payroll all along? Reasonable compensation?

[Medlin Software, Dennis]

"conceivably can create a payroll for 2019 paying himself $128,000 in December"  To be blunt, impossible to do legally, even though MANY do so every following Q1.

Come Q1 every year, I get inquiries regarding creating improper payrolls for the year already ended.  I decline to help, and try to educate, which usually results in a no sale or a refund, since I will not help fake a payroll.  This is one of the issues which shifted me, over the decades, to mainly written communication (evidence trail) rather than offering advice in a verbal form, since we are in a generation or three of "who can I offset the blame for my error" society.

QBI has likely made this type of inquiry more common, but I do not ask the reason.  I suppose QBI has also assisted with reasonable compensation compliance, as well as provided some consultation work when a business has enough income to be able to optimize for QBI.

[Edsel]

Thank all of you for responding.  It doesn't bother me to have my character impugned so long as all of you are speaking your mind.

At the center of this is a seeming issue of integrity - prostituting principles of right and wrong in order to save $$ for a client.  If it is allowed, the unsavory nature that many of you find reprehensible actually pales in comparison to the many regulations and actions of the IRS which are stacked against taxpayers with even less regard to right/wrong.  I would imagine even my Fresno State colleague has chosen actions to help clients simply because they were allowed.

Allowable options are exactly that - "allowable".  That was the essence of my original question.

Additionally, as is so often the case, no one but myself knows all the circumstances of the client - yes, a long-time client of 20 years.  For what it may be worth, I have decided against creating a payroll, based on evaluating the upsides and downsides of the situation.

Again, I appreciate all the responses, and encourage any and all of you to speak freely.

Best regards, Edsel

 

[DANRVAN]

3 hours ago, Edsel said:

no one but myself knows all the circumstances of the client -

That is true, but the limited information provided does not indicate a legitimate position taken in the past or present.

Yes, we do have a responsibility to keep our clients in compliance with the tax code and and allow them the maximum tax benefits available.

So if this client had actually paid himself a one time payment during the year of $128,000 in December he would have a case.

However, if instead he had taken monthly distributions of $10,000, then he needs to report payroll accordingly, regardless of the QBID benefit.

You have not explained how you can "conceivably can create a payroll for 2019 paying himself $128,000 in December."

[jklcpa]

Edsel, I'll cut to the chase. In at least 2 posts you've indicated a potential action of "creating a payroll in December," and in your latest post you made the decision by "weighing upsides and downsides." 

If by "creating" you mean to backdate a check to December to make that payroll, that would be illegal and unethical.  Don't do it.  I would view this action as fraudulent and unethical; a sham no different than manipulations to maximize the earned income credit. We can correct errors in classifying existing transactions that actually occurred during the year, but we shouldn't be creating transactions after the fact to arrive at a more favorable result.

If by "weighing" you mean to consider an action based on the benefit to the client over the legality or ethical practices as a preparer. First and foremost, your decision should be based on law and ethics, and only when what you are considering falls within that scope should the benefit to the client be considered.

[Roberts]

I had a dream about doing taxes last night.
 

It's that time of year folks!

[Edsel]

If it makes any difference at this point, the quasi-"payroll" would replace a 1099-MISC issued to him in January for $128,000.  And yes he has paid himself at least this much, including all distributions.  No, they were not all made in December.  I hope I would give myself credit enough to not backdate a check into December.

[Lion EA]

Hopefully, his S-corporation is giving him a K-1 that will detail his distributions, as well as income and expenses. Who issued him a 1099-MISC? Does he do business as an individual as well as an employee/shareholder of his S-corp? Tell him to start payroll NOW.

[Medlin Software, Dennis]

I am not doing the math... how would forensically changing the distributions to payroll, with the fees you would charge, along with the penalties, interest, and other costs, compare to obtaining the QBI?  This assumes the forensic payroll correction would be 100% clean, with regular payrolls meeting the freq for the state (not just a check in Dec), reasonable comp, recording of all time worked (this applies even to salaried employees in many jurisdictions). etc.

This is what "gets" me... as when my customers ask for anything similar, they always want just one check in December, which does not "fly" for me.  Just because an owner/shareholder is also an employee does not mean the company can treat the employee any differently as a stranger employee.  No stranger employee would perform services all year for one check in Dec, even if the law allowed it.

[jklcpa]

2 hours ago, Edsel said:

If it makes any difference at this point, the quasi-"payroll" would replace a 1099-MISC issued to him in January for $128,000.  And yes he has paid himself at least this much, including all distributions.  No, they were not all made in December.  I hope I would give myself credit enough to not backdate a check into December.

Well, now I have more questions. Does this person have any compensation on a W-2 from the S corp at all?  Who issued the 1099-misc?  Each year this happens, have you advised him on the ramifications of tax avoidance by circumventing tax and payroll laws? Does he have other employees misclassified as 1099-misc contractors?

This may be a good read for you and as a starting point for a discussion with this client: https://bradfordtaxinstitute.com/Content/Do-Not-Defeat-Your-S-Corporation-by-Paying-Yourself-on-a-1099.aspx

[Edsel]

Of course I don't have the time to display all the characteristics of my customer, and my prior conversations with him about payroll, attempts at same, and 1099s - in some years issued more because the IRS will accept a 1099 to an owner to satisfy their requirements for a "fair compensation" for S corps.

Basically the straw that broke the camel's back (the chief reason among others) is the fact that a 4th quarter payroll implies that he was paid the amount during the fourth quarter.  That is clearly a misstatement of facts (in Tennessee behind-the-barn language, a lie).  Recharacterization of income or expenses is one thing - a blatant untruth is something different.  This crosses the ethical and moral line.