Need S Corp tax return help

[cushionhead]

I work freelance in the film industry, and a few years ago took advice to form an single shareholder S Corp (in Florida where I live). I have since done a portion of my jobs using the company (rather than personally going on payroll). For a couple years I had an accountant do my tax returns, but for 2013 had such a small amount of income that I am attempting to do the return myself (using the previous year's return as a template, which was very similar financially).

I am confused as to how the accountant handled my salary and distributions, and how I should do it. Although I transferred most of the money to my personal accounts, he did not list any "compensation to officers" or "salary & wages" on the 1120S. I have read that this is what gives S Corp returns red flags for audits (and yes, I should have considered this when I got the completed return, it's true--lesson learned). He simply deducted expenses from the income and reported the difference on line 21 of the return, "Ordinary business income", which he then transferred to my 1040 return on Schedule 'E' and line 17 of the 1040.

My questions are this: 1) Do my past year returns need to be amended and/or are they an increased risk for audit? 2) How should I proceed this year? If I do take a salary, does the company need to do a W2 or something for me?

Thanks for any advice you have.

[Evan]

I hope you filed an extension, as the penalty for not doing so and filing a late return will add up quickly.

If you don't do payroll, you don't have a "salary" and "compensation to officers". What he may have done is considered it a distribution, which shows up in a few areas, but also on Schedule K and K-1. It's also possible he classified it as a note payable, meaning a loan the corporation made to you. Some folks do this even if it's not the appropriate method, and this catches up eventually. Your prior year return should have some of these details, so look at how it was filed.

You should pay yourself a reasonable wage, though if your income was small, you don't always have to take a salary. But in exchange, the company isn't expected to provide you distributions either. I wouldn't file payroll returns for last year as you're going to also get hit with penalties for late filings and payments.

[cushionhead]

Thank you Evan. Yes, I did file an extension. I'm pretty sure he considered it a distribution. I did not make any payroll returns for the year, so I get your point that paying myself a salary would create a problem. All in all I'm not too worried about 2013 since the income was small, it's the previous years (one of which was pretty good) that makes me wonder. Mostly I just want to learn to do this correctly in the future.

A further question, if I may: although the company did not have a great deal of income, I/It still had expenses, which in total are more than the income. In the past my accountant had split the expenses between the company (on the 1120S) and on my personal return using Form 2106. Does it make sense to do this again, or to show a loss for the company? I suspect he divided the expenses between the company and myself for a reason, just not sure what it was. My instinct is to divide the expenses between the two to match the percentage of total income of each.

[Evan]

The only reason I can see he's listing expenses on 2106 and not the 1120S is perhaps you're going to be exceeding your stock and debt basis in the S-Corp, which would result in disallowed losses and possibly taxable income. Hard to know for sure without all of the specifics.

[Jschultz]

I do not see an issue with the presentation. Going forward you should take some sort of W2 wage. You cannot go back retroactively and create a W2. But any S Corp owner participating in the business should receive some sort of wage.

Also, understand that S Corps do not pay taxes on distributions. S Corps transfer the net profit via a K-1 to the shareholders. The shareholders pay tax on the profits the company makes.