PS Cont made, but company doesnt want to allocate

[Lori H]

A small (2 person) calendar year profit sharing plan made $20,000 contribution for the 2008 plan year. In 2008 there were 3 new participants for a total of 5 as of 12/31. During 2008 and on the advice of his new book keeper, the owner, a chiropractor, drew no W-2 earnings and reported all of his earnings as dividends. Well, the plan defines comp as w-2 earnings only. Therefore, he gets nada for an allocation. However, he does not want the other particpants to get such a large contribution. He has already filed his 2008 corporate tax return. What can we do, if anything, outside of allocating the contribution to those who had w-2 earnings? Refund it back with an amended tax return? Hold in suspense? None of the above, I am thinking other than to allocate.

(he never consulted his Advisor or TPA when he switched from w-2 earnings to dividends)

[jpod]

It seems to me that the only permissible choice of the 3 you proposed is to allocate based on the W-2 comp.

However, there may be a variation to that choice. I assume this is an S Corp. (Paying comp. as "dividends" in a C corp. makes no sense.) In that case the failure to pay the owner any W-2 wages was probably a bogus attempt to avoid tax withholding and social security and medicare taxes which would never succeed if the IRS detected this. Therefore, maybe the "dividends" actually paid to the owner in 2008 can be recharacterized in whole or in significant part as wages, 941s can be adjusted, a corrected or late W-2 can be filed, and the appropriate amount of withholding taxes and employment taxes deposited, and voila the owner would have W-2 comp. that would allow him to share in the allocation of the contribution.

[Lori H]

jpod,

yes, they are a S Corp and yes, they paid dividends to the Doctor in order to avoid FICA and other taxes.

[david rigby]

Was the contribution actually made in 2009? Could it be declared as a 2009 PY contribution?

[Lori H]

No, it was actually made in 2008. Sept 08 to be exact.

[J Simmons]

It seems to me that the only permissible choice of the 3 you proposed is to allocate based on the W-2 comp.

However, there may be a variation to that choice. I assume this is an S Corp. (Paying comp. as "dividends" in a C corp. makes no sense.) In that case the failure to pay the owner any W-2 wages was probably a bogus attempt to avoid tax withholding and social security and medicare taxes which would never succeed if the IRS detected this. Therefore, maybe the "dividends" actually paid to the owner in 2008 can be recharacterized in whole or in significant part as wages, 941s can be adjusted, a corrected or late W-2 can be filed, and the appropriate amount of withholding taxes and employment taxes deposited, and voila the owner would have W-2 comp. that would allow him to share in the allocation of the contribution.

As jpod's post illustrates, there are times when playing it straight actually benefits the taxpayer. Dropping S corp payroll for owner-employees below what is reasonable compensation for the personal services performed is not good tax planning.

[Jim Chad]

Since paying zero W-2 comp is not legal, should this be corrected?

If Everything is corrected for last year to Pay him reasonable comp as required by law:

Give him a w-2

Amend the W-3

Consider it all a year end bonus and amend the last quarter 94? (is it 941?) including paying penalties.

The above should be done, even without the profit sharing.....but then you can allocate the profit sharing and give him some of it.

This is my opinion for what it is worth.

[Lori H]

i agree. i think he needs to go back and amend. he hired a new book keeper of the aggressive type and never consulted with anyone before going all dividend.