Wife an I have real estate firm LLC this year we elected to be taxed as an S-Corp and filed all proper paperwork. I was aware that she would need to take a salary and have been taking regular withdrawals from business account thinking this was sufficient to be considered a salary. I have also been paying quarterly estimated income taxes. Now I realize she should have been set up on a payroll and we should have been paying quarterly payroll taxes. Is it too late to fix this or would if be better to just file to cancel the S-Corp selection and file taxes as LLC this year
About the only reason I see to elect corporation taxing for an LLC is for owners to be employees. Election is not to be taken lightly or switch yearly.
Yes, wages are supposed to be regular but consider the case of an LLC who is not profitable for first 10 months, should the owner be collecting a paycheck when the money to provide it has to be borrowed?
You can and should reclassify to date draws as net pay and gross up the wages for W2. You will have to file forms and pay taxes and will owe penalties but you will get a huge refund from the looks of it.
If no regular draws had been taken it would be much easier to justify that the reasonable salary is calculated only after it was determined there would be profit or that it was to be a single annual payment