Are Federal and State withholding tax mandatory?

[Ringers]

The client wants me to prepare a 2019 W-2 to change a portion of the 1120-S distributions into "reasonable compensation" after we had a conversation about her past returns.  I am OK with amending all the 941's, 940, and state unemployment returns.  I know I have to withhold FICA and Medicare, but is it mandatory to withhold Federal and State income tax withholding?  We have agreed on a gross payroll amount of $100000.00.  I am trying to cut down on the penalties and interest the client will pay on the late W-2/

[Medlin Software, Dennis]

Separate yourself, and your client, from the "employee" who wants a made up (my term) W2 for 2019.  Treat the "employee" as a stranger, and make sure the "employer" complies with all regulations.  It may be best to refer to a forensic payroll expert who has experience cleaning up this type of situation without causing more problems, or causing you to be pressured to prepare forms which are not accurate.

[Lee B]

In the past when I have had clients with similar issues, I have always focused on getting the clients into compliance going forward.

I have done some scrambling prior to January 31st to clean up the prior year.

Perhaps I have been fortunate, since not amending prior years has never bitten my clients and me in the butt.

[BulldogTom]

In my experience, as long as the employee does not file a complaint against the employer and pays the tax due on their personal return, the IRS and State do not come after the employer.   It usually only becomes an issue when the employee fails to pay their taxes on the income from the employer that the IRS or CA look to the employer for withholding that should have been done.   I know this is not how the law reads, but it is my experience.

Tom
Modesto, CA

[Abby Normal]

Have the employee fill out a W4 and state equivalent that will result in zero withholding of income taxes.

[Medlin Software, Dennis]

1 minute ago, Abby Normal said:

Have the employee fill out a W4 and state equivalent that will result in zero withholding of income taxes.

Personally, I would not accept such a W4 as it is clearly not valid (back dated).  If there was no valid W4 in place before the 2019 "checks" to be back dated, then it must be (for 2019) Single, 0 allowances, and no other adjustments.

Not saying there is a good chance of getting caught, just that the slope is slippery.  This forum is public, so it makes no sense to post anything "slippery" here, regardless of the chances of getting caught.

 

[Edsel]

I would discuss creating a payroll situation going forward into 2020, and let 2019 go as it is.  Trying to shoe-horn another W-2 into already-filed 2019 invites a train wreck.

Why does he want a W-2 for 2019?  Does he want "earned income" so he can contribute to an IRA or SEP?  If so, consider issuing a late 1099 for non-employee compensation.

 

[Ringers]

The 1120-S for 2019 has not been filed yet.  I have looked at the 1120-S for 2016, 2017, and 2018 and they show about $170 K each in profit with no shareholder wages (Dental practice).

The former accountant is in very poor health and I have taken over the returns.  I do not want to prepare the 2019 return without reasonable comp, and thus continue the erroneous ways of the former accountant, but I want to keep the penalties down for late filing and payment of the 941, 940, etc.  Also, as a side note, may want to file for a PPP.  I know that sounds "convenient" but my primary goal is to get him into compliance even though in doing so it opens up a PPP opportunity.

[Abby Normal]

18 hours ago, Ringers said:

I do not want to prepare the 2019 return without reasonable comp

It's not your decision, though. The client has to make that decision. I'd probably let sleeping dogs lie and start payroll in 2020.

[michaelmars]

Post the expense as a professional fee not as a distribution.  This way fica gets paid on the income.  Only losers are state and federal unemployment which are minor.  If you want to be extra cautious you can issue 1099's late and pay that penalty.

 

[Lee B]

1 hour ago, michaelmars said:

Post the expense as a professional fee not as a distribution.  This way fica gets paid on the income.  Only losers are state and federal unemployment which are minor.  If you want to

you want to be extra cautious you can issue 1099's late and pay that penalty.

 

I will have to admit, this is a different approach and it would avoid the late filing fees and penalties on the federal and state quarterly reports.

However the taxpayer is an employee, not an independent contractor.