Compensation of officer but no W-2 wages

[ILLMAS]

This past week I took on two new 1120S clients, no payroll was prepared for 2019 but the prior preparer put down amounts for officer compensation.  The same amount was used on Sch C and SE tax was paid.  In all my years I have used that line for officer on the payroll, is okay to use that line when they just take out money?

[Lion EA]

I'm with you. I've used that line and the wages line to tie out to the various payroll reports. I've used distributions for non-payroll withdrawals. I can kinda see the point of using Sch C and SE to pay the tax if there was no payroll. But that should happen only once! I'd educate that client. If they continued taking money without payroll, they'd no longer be my client. Maybe that's what happened here. Why did they leave their last preparer? Do they seem able to be educated, motivated to change right now for 2021?

[ILLMAS]

Good question, first client was told by the mortgage banker their return was prepared incorrectly (you guessed it, no payroll) for 2019, the second was a referred by another new client.  I do take the time and explain to them how things work, about two years ago another new client was paying themselves very low wages and I told them their salary doesn’t seem reasonable and you should increase it etc.. Last year when they went to get pre approved for a loan the banker told them their return was prepared incorrectly because their wages were too low, client actually defended my work and basically everything the banker had told her she already knew from me

[ILLMAS]

Payroll is in the work for 2021 for both.

[Slippery Pencil]

Line 7 on 1120-S says "compensation of officers", not "wages of officers".  Line 7 instructions state:

Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.  Enter on line 7 the total compensation of all officers paid or incurred in the trade or business activities of the corporation. The corporation determines who is an officer under the laws of the state where it is incorporated.

[Lee B]

3 hours ago, Slippery Pencil said:

Line 7 on 1120-S says "compensation of officers", not "wages of officers".  Line 7 instructions state:

Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.  Enter on line 7 the total compensation of all officers paid or incurred in the trade or business activities of the corporation. The corporation determines who is an officer under the laws of the state where it is incorporated.

I am not sure where you are going with this, perhaps nowhere other than quoting instructions?

When I have encountered this situation, I recorded a onetime  wage payment as of December 31st, and filed the appropriate 4th quarter and annual payroll reports

and had the client pay the payroll taxes due.

[Slippery Pencil]

Not going anywhere with it.  I'm answering the OP's question.