January 30, 2020 at 1:29 pm #2908002
I was hoping someone familiar with taxes can help me on this issue I am having. I file taxes for my in-laws. My father-in-law has an S-Corp. He does construction projects for clients but only makes about $6K in profit in a year. I file taxes for my mother-in-law, who works for an employer and gets a W-2. I include both of them in the standard 1040 form as “married filing jointly”. I also include my father-in-laws profit from his S-Corp as a flow-through.
They both make under $30K annually and receive a refund. The problem is that my father-in-law never paid into social security. He doesn’t work for an employer and I am at a loss at how to arrange for him to start contributing towards it. Searching google hasn’t given me a clear answer. The mother-in-law pays her FICA through her employer, but the father-in-law doesn’t have an employer and isn’t technically an independent contractor. How do I handle this?
Thanks in advance!
January 30, 2020 at 2:35 pm #2908041NYSCPAParticipant
Shareholders in a S Corp are considered both Employer and Employee. Therefore, you have two options 1) purchase software, CFS, Quickboks, etc.) and run a payroll for your Father-in-law from his S Corp. 2) Pay a payroll company to process the payroll (ADP, Paychex, etc.) When doing this the S corp (Employer) will pay the employer's share of FICA, and the business will withhold and remit your father in laws (employee) share of FICA.January 30, 2020 at 2:40 pm #2908044
One, you can select the optional method of calculating the SE tax in your software, or option 2 is to just use the total pass-through profit from the S-corp on the Schedule SE.
If I have a client with an S-corp that is not on payroll I will generally carry over the K-1 income as subject to SE tax (by brute force data entry in my tax software) so they pay into FICA.
I use this method to reduce the exposure to a Officer's Comp audit for the S corp officer that does not receive a W2.
It's not technically correct, but it achieves the purpose and has never been questioned by the IRS to date, going on 18-19 years.
Option method, you can find more information here.
It's a great way for a small business owner/sole prop with a loss to still be able to get credits towards their SS.
You actually do your clients a great disservice if you do NOT offer this optional method, and they end up getting hurt and need to claim disability and don't have enough credits.
Good way to get a lawsuit, and a good reminder to carry your E&O insurance.
NYSCPA is technically correct in his/her response, the officer should be on payroll, but my 2 above explanations are the real world work around for a small S corp that can't afford a payroll service. Just dump the profit on the Schedule SE. If you use tax software you should have a folder under Taxes to manually input income for the SE tax purposes.
If that is not an option you can use a workaround of telling your software that the K-1 is from a 1065, and manually input the profit in box 14A for earnings from self-employment.
That should auto-populate the SE as well.
I am not sure how old your inlaws are, or how long he has not been paying in to FICA, but depending on age he might be too late to catch up, and might end up claiming half his wife's SS benefit when he retires.January 30, 2020 at 4:53 pm #2908140
Thank you both very much!
I'm researching the schedule SE form and the instructions only reference partnerships and form “K-1 1065”. The forms I filed in the past are the “K-1 1120S” The profit is in a different box than the “1065 K-1”. I'm worried that the software may not accept me using the K-1 1120-S. My father-in-law is going to be 60 this year. He hasn't paid into social security at all. I'm worried this might open him up to an audit/penalties etc.
I'm not an expert on SS. Would he qualify for half his wife's benefits without paying into SS? He's been filing his 1120S and been reporting his profit as a flow-through. The FICA part was missed entirely.January 30, 2020 at 5:05 pm #2908149
Yes, I assume he would qualify for half his spouse's benefit. That is how it normally works. Not an expert on SS either, but something to look in to.
Yes, the instructions only mention the 1065 because S corp officers are required to be on payroll and there should be actually be SE tax on the 1120 K-1.
The method I gave you is the work around. Disregard the 1065 K-1 for now and just see if you can add the profit as subject to SE tax in your softwares tax folder.
It's very easy in mine, as an adjustment to SE earnings. It doesn't duplicate the income for income tax purposes, it just adds that dollar amount to the SE for the husband.
leaving the office shortly, and I have some appointments out of the office in the morning but I'll check back on this thread later tomorrow, maybe about 11am ET.
to be clear, what you are doing here is not technically correct, but the IRS never says no to collecting more tax.
You will not find this method in the form instructions because it is not the letter of the law method, but it works. Trust me.
You're going to have to wing this one.January 30, 2020 at 5:52 pm #2908155
Your father should be receiving a W2 each year for the SCorp. If he is not then he is not in compliance and can be viewed as evading payroll taxes by the IRS. He has probable gotten away with it so far due to such a small bottom line. Keep in mind last week I saw an IRS letter questioning a 2010 1120s so don't be surprised if it catches up with him.
1. The SCorp shareholder must have a W2. Run a late payroll, shove it through today so it posts tomorrow on EFTPS or the call in. AT $6000.00 net income tax run it for $3000.00, do a Q4 941 for 3000.00, ss would be $372.00, medicare will be $87.00, (this is both company and employee.) just do a couple few dollars to FIT. Mail in the 941 report and make sure the payment is made through EFTPS or the call in # 500 555 3453. Put the gross $3000.00, the FIT, and the employee share of SS/medicare on the W2 (use BSO it is faster and easier) https://www.ssa.gov/bso/bsowelcome.htm
2. This knocks $3000.00 off the bottom line, so $3000.00 on the K1 instead of $6000.00. Deduct to $2770.50, then the SE tax due will only be $423.88 (x.153), half deducted on Sch 1.
In the future, work with a CPA who does SCorps (small to medium business tax returns) before doing others taxes.January 30, 2020 at 6:02 pm #2908164
And! You need to do a 940- it'll be $420.00 for him unless he has payroll (employees) and they are the majority of the wages.January 31, 2020 at 11:00 am #2908887
Fassopony is technically correct, the IRS does require the officer to be on payroll.
But in the real world some Scorps are not large enough to be able to afford payroll service.
The only tax exposure for failure to have payroll is the IRS reclassifying the profit as wages up to the SS wage cap for any given year.
If you report the K-1 profit as subject to SE tax on the Form SE, there is no longer any tax exposure because the FICA taxes have already been paid in full.
They can ask about it, and you can explain, but all taxes will have already been paid in full.
I can appreciate the technical answer, but to go and stuff a 4th quarter payroll filing and have fed and state payroll filing requirements moving forward sees like a hammer killing a fly.
I'd just do the SE and call it a day.
I'd be curious to see the letter questioning 2010.January 31, 2020 at 11:30 am #2909589
Thanks again! I was thinking the same thing too. My in-law doesn't employ anyone and barely makes any profit so filing quarterly payroll, like he's operating Amazon, seems absurd. I'm gonna try filing an SE. After looking over the form, my understanding of the process is that there is a field to input his social. Once I input his social and file the form, that will connect with the social security administration and they will update his social credits for the year in their system?
Lesson learned is that even though many say that those who operate an S-Corp are getting away with paying FICA, the downside is that once they retire they can lose out on their social & medicare benefits.January 31, 2020 at 12:46 pm #2909823
The SE is attached to the personal return. The SE is included with the personal tax filing, it is not separate.
The SE tax will be baked into the mix of any tax owed on the personal return.
Yes, once you file the SE and the taxes are paid, the SSA will be updated with his SE earnings for 2019.
You can also go back and amend returns if he is short on credits, but like I said, if he's never paid in he will probably be better off getting the spousal benefit.
If you do go back and amend, it will cost the tax plus interest and penalty so I would avoid this unless a disability situation or similar.
So people with S-corps should NOT be skirting the FICA tax. The S-corp loophole does allow them to pay LESS in FICA, but their wage should still be fair and reasonable, and if they don't have a W2 wage, the total profit should end up on the SE to avoid that audit exposure.January 31, 2020 at 1:07 pm #2909838
You all do whatever you like but I think one of the root issues is this- “Lesson learned is that even though many say that those who operate an S-Corp are getting away with paying FICA, the downside is that once they retire they can lose out on their social & medicare benefits.” Further, the IRS does not consider ability to pay for something or someone's bottom line a valid reason for noncompliance.
I have no idea how anyone would even begin to think that having an S Corp would allow for not paying FICA.
I also think this is a big example of why it is prudent not to assume that anyone with a CPA after their name can or should do tax.
Best to you all.February 2, 2020 at 7:50 am #2913078MikeyParticipant
You don’t have to actually pay the payroll if cash is tight. If you use QB it’s pretty common to see a payroll run and then a GJE to Dr. Cash and Cr. Owner Contribution (or shareholder loan, etc.).February 2, 2020 at 8:11 am #2913108MikeyParticipant
Also, yes, you should not use an S Corp as a way to avoid paying into FICA; but it is a great tool to avoid having to pay SE tax on 100% of net earnings, which seems absurd to me. Better to pay yourself a wage as an S Corp and only pay FICA on the wage. If you’re worried about retirement, take the money you would have paid in SE tax as a Sch C filed and invest it.
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