ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – Corporate Officers are Statutory Employees introduction
By Robert S. Schriebman
When the EDD conducts an audit of a corporation or LLC one of the first things the auditor looks for is whether or not the entity has officers who are not treated as employees. All too often many small companies do not follow the formalities of legally recognizing officers. The EDD finds that many small companies do not pay officers salaries, but instead give them a “draw”. The draws are rarely reported as income. S corporations pay out distributions in lieu of wages and no payroll taxes are taken out. EDD auditors have a field day assessing large taxes and penalties.
On July 14, 2021, The U.S. Tax Court issued a decision in Blossom Day Care Centers, Inc., Dec. 61,898(M). In this case two individuals of a corporation where legally classified as employees thus making the corporation liable for employment taxes (FICA) and unemployment tax (FUTA) relating to wages paid to both of them.
This article will discuss the Blossom Day Care Centers Inc case and the Tax Court’s findings.
Blossom Day Care Centers Inc, case
The IRS conducted an audit of the corporation and found that the officers where not treated as employees. No payroll tax returns where not filed either quarterly or annually. The IRS threw the book at Blossom to the point of assessing fraud penalties. This is a very important point-there seems to be more fraud charges in conjunction with payroll tax audits than ever before.
The Tax Court found the following:
- The employees were corporate officers;
- The employees provided substantial services far beyond minor services:
- The employees directly and indirectly were paid for their services;
- The employees were shareholders
- The employees had check signing authority
While Blossom involved an IRS audit, the EDD will look for the very same misconduct. The EDD will assess harsh penalties that may include two 50% fraud penalties as well as penalties for failure to issue W-2 or 1099 forms.
Under both federal and California laws corporate officers are statutory employees. They must be paid reasonable compensation and there must be payroll taxes withheld and remitted to both the EDD and IRS. Quarterly payroll tax reports must be timely filed with both the EDD and the IRS. It is okay to make loans to the corporation or LLC, but proper formalities must be observed. There must be both corporate minutes and a written promissory note. If you do not have the correct paper work, the tax man will not recognize the transaction. Potential loan repayments will be treated as wages.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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