Q:

Subject: Tax Advice

 

Kerry,

I do taxes for individuals, but not for businesses.  A friend of the family approached me about doing taxes for his business but I am referring him on to someone who can help him.  For my own personal knowledge and because he is a family friend, I have a couple questions on his situation.  He has not filed his business taxes for several years.  In addition, he paid his employees as contractors (but did not issue 1099’s) even though I believe they would be considered employees under the IRS’s 20 step test.  As this goes back several years, it is difficult to rectify the situation just by issuing 1099’s and hoping the IRS doesn’t audit.  Will he have difficulty finding a preparer (i.e. does the preparer have liability if he prepares the taxes for those years knowing the workers should have been classified as employees)?  Any suggestions on how he should proceed?

Thank you for your help.

A:

While every tax pro has his/her own approach to handling cases such as your friend’s, there shouldn’t be a problem finding one to take this on.  Over the past 30 years, I have worked on several cases just like this.  Most tax pros who are looking to expand their practice would be glad to have a big multi-year project.  The most critical issue is to bring the income tax returns up to date. 

In those cases, we decided the best approach was to keep the worker classifications as they were for the past-due returns.  Going back and filing very late 1099s or worse, changing the status to W-2, has far too much potential for opening a very messy and expensive can of worms with IRS and the State tax agencies.  I always warned the clients that they were on shaky ground with the status, and that IRS and/or the state could try to change it.  Luckily, they never did.  They were just glad to receive the delinquent income tax returns.

For future payments to workers, we made sure the clients were treating their workers properly in accordance with the rules.  This sometimes meant setting them up as W-2 employees or having them sign independent contractor agreements.  In some cases, the client insisted that any workers themselves be incorporated in order to prevent any possibility of being classified as a W-2 employee.

I hope this helps. 

Kerry Kerstetter

 

Q:

Subject: Tax Question

 

What are the rules governing health insurance premiums for the single shareholder of an S Corp who is also an employee?  Is it considered taxable income on the W-2?

A:

Any person owning more than 2% of the S corp stock must report the health insurance premiums as taxable wages on his/her W-2. 

As I’ve mentioned countless times, that is not the case for shareholders of C corps.

Your personal tax advisor can give you more detailed assistance with this.

Kerry Kerstetter

 

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Q:

Hi,

I was wondering if you could tell me what power I have as a 30% owner, with one other owner at 70%.  The other owner is my father and he is not doing the job he should be doing as the President of the corp.  Do I have any legal control or say in the operation of our business?

Please help!

A:

You will need to work with an attorney on this matter.  S/he will need to see all of the documentation for the corporation and the issuance of the stock, including any governing documents that set out the legal and fiduciary responsibilities of shareholders and officers of the corporation.

If you don’t have any such written documentation, you may be SOL since anyone owning over 50% of a corp can usually run the show.  You then have the choice of selling your shares, subject to any restrictions in the corporation’s governing documents.

Good luck.

Kerry Kerstetter

 

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