S-corp owner with QBI questions - can I take QBI deduction without proper payroll?

Thanks so much for explaining this! If I'm understanding correctly, I'd need to file those payroll forms late to possibly save some of that income from being classified as all salary. Do you know roughly what kind of penalties I might be looking at for late payroll filings? Also, is there a statute of limitations on this sort of thing?

The penalties for late payroll tax filings can vary based on how late they are and whether the IRS considers it a willful neglect. Generally, you might face a failure-to-file penalty of about 5% per month of the unpaid tax amount (capped at 25%), plus failure-to-pay penalties of 0.5% per month, and interest on the unpaid amounts. There could also be penalties for not providing W-2s to yourself as an employee. The statute of limitations is generally three years from the filing date for most tax matters, but it's important to address this sooner rather than later. Your CPA might be able to request penalty abatement if this is your first offense, especially if you can demonstrate you're now taking steps to comply with proper payroll procedures.

That sounds interesting but I'm skeptical about AI for tax advice. How accurate was it compared to what a CPA would tell you? Did it actually save you money or just confirm what you already knew?

Does it help with fixing prior year mistakes like the OP's situation? I've got a similar issue with my LLC that elected S-corp status but I didn't run proper payroll my first year. Wondering if this could help me figure out how to correct things.

The accuracy was surprisingly good - I actually had my CPA review the recommendations and he was impressed with how it handled the QBI calculations. It saved me about $3,800 in taxes by correctly identifying which business income qualified for QBI and helping me document a proper reasonable compensation amount. For prior year mistakes, yes - it actually has a specific module for addressing compliance issues from previous tax years. It walks you through the exact forms needed, potential penalties, and strategies for minimizing the financial impact of corrections. It even generates documentation to support your position if questions come up later.

How does this actually work? I've called the IRS countless times and always get the "due to high call volume" message. Do they have some special line or something?

This seems too good to be true. Why would this service be able to get through when no one else can? And did you still have to pay all the penalties for the late payroll filings?

They use some kind of callback technology that navigates the IRS phone tree and waits on hold for you. Once they get a human on the line, they call you and connect you directly to the agent. It's not a special line - they're just using tech to handle the frustrating hold times. I did still have to pay penalties, but the IRS agent I spoke with explained I could request penalty abatement since it was my first time making this mistake. They told me exactly what to include in my abatement letter, and I ended up getting about 80% of the penalties waived. Without that direct guidance from the agent, I probably would have just paid the full penalty amount.

Quick question - if the S-corp owner does late payroll filings for 2022 now, can they still take distributions for the remainder after the reasonable salary? Or does the lack of contemporaneous payroll filings mean all income has to be classified as salary?

Yes, if they file the late payroll returns and pay the associated taxes and penalties, they can potentially still classify a portion of the income as distributions rather than salary. The key is documenting why the salary amount chosen is "reasonable" for the work performed. The IRS doesn't have a specific rule saying all income must be salary if payroll wasn't run contemporaneously, but they will scrutinize the situation more closely. Having objective data supporting the salary amount (industry standards, comparable positions, time worked, etc.) becomes even more important in these cases.

Good point. My S-corp is in California and the state penalties were actually worse than the federal ones when I had to fix a similar situation. OP should definitely ask about state-specific requirements.

This is really helpful advice! I'm curious about the documentation piece you mentioned - what kind of industry data would be most convincing to the IRS for justifying reasonable compensation? Are there specific sources they prefer, or is it more about showing you did your research? I'm worried about picking a salary amount that's either too high (and losing QBI benefits) or too low (and triggering scrutiny).

Great question about documentation! The IRS doesn't specify exact sources, but they do look for objective, third-party data. Some of the most credible sources include: 1. Bureau of Labor Statistics (BLS) wage data for your occupation and geographic area 2. Industry salary surveys from professional associations 3. Job postings for similar positions in your area (Indeed, LinkedIn, etc.) 4. IRS Factor Test consideration - looking at training, experience, time devoted, responsibilities, etc. The key is showing you made a good-faith effort to determine market rate. I typically recommend documenting 3-4 different sources and explaining why you chose the salary amount you did. For your situation, you want to find that "Goldilocks zone" - high enough to avoid IRS challenge but not so high that you lose significant QBI benefits. Many CPAs suggest aiming for the 25th-50th percentile of market rates rather than the top end, especially if you can justify it based on factors like being a newer business, part-time involvement, etc. Keep copies of everything you reference, including the date you accessed the data, since wage information changes over time.

Great question about documentation! The IRS doesn't have a specific list of preferred sources, but they do look for objective, third-party data that supports your compensation decision. Here are some approaches that tend to work well: 1. **Bureau of Labor Statistics (BLS)** - Their Occupational Employment Statistics provide median wages by occupation and geographic area. This is probably the most defensible source since it's government data. 2. **Industry salary surveys** - Professional associations often publish compensation surveys for their fields. These can be particularly useful if your work is specialized. 3. **Job posting analysis** - Screenshots or printouts of similar positions in your area with salary ranges can help establish market rates. 4. **Comparable company data** - If you know what similar businesses pay their owner-employees, document it (though this is harder to verify). The key is showing you made a good-faith effort to determine market rates rather than just picking a number. I'd lean toward being conservative - it's better to err slightly on the high side for salary than risk having the IRS recharacterize distributions as wages later. The QBI savings on a smaller distribution amount is usually still better than losing it entirely. Document your research process and keep all the sources you used. Your CPA can help you put together a reasonable compensation study that would hold up under scrutiny.

Great question! For IRS documentation purposes, the most credible sources include Bureau of Labor Statistics (BLS) data for your occupation and geographic area, salary surveys from professional associations in your field, and compensation studies from reputable firms like Robert Half or PayScale. The IRS also looks favorably on data from similar businesses in your industry. What's key is showing you used objective, third-party sources rather than just picking a number. I'd recommend gathering 3-4 different sources that support your salary range. For your situation with ~$36k seeming reasonable, make sure you can point to data showing that's within the normal range for someone with your experience level doing similar work in your area. The IRS generally won't challenge a salary that falls within the reasonable range supported by credible data, even if it's on the lower end. They're more concerned about salaries that are clearly too low (like $10k when market rate is $50k) than they are about minor variations within the reasonable range.

Great question about documentation! The IRS doesn't specify exact sources, but they do look for objective, third-party data. Here are some solid options: **Best sources for reasonable compensation data:** - Bureau of Labor Statistics (BLS) occupational employment statistics - PayScale, Salary.com, or similar compensation databases - Industry association salary surveys - Robert Half or other staffing agency salary guides - Local economic development authority wage data **Key factors to document:** - Your specific job duties and responsibilities - Hours worked (full-time vs part-time) - Geographic location (cost of living adjustments) - Company size and industry - Your experience level and qualifications The sweet spot is usually finding data that shows a reasonable range, then picking somewhere in the middle-to-lower end of that range. This gives you defensible justification while maximizing your QBI-eligible distribution. Pro tip: Save screenshots or print copies of your research with dates, since online salary data changes frequently. Your CPA can help you compile this into a formal reasonable compensation study that goes in your tax file. The IRS is generally more concerned with salary amounts that seem unreasonably LOW rather than slightly high, so don't be afraid to err on the side of caution if you're between two amounts.

Great question! For documentation, the IRS typically looks for objective, third-party sources. Here are the most credible options: **Best sources for salary data:** - Bureau of Labor Statistics (BLS) Occupational Employment Statistics - PayScale, Salary.com, or Glassdoor for your specific role/location - Industry association salary surveys - Local employment agency data **Key factors to document:** - Your actual job duties and responsibilities - Hours worked (full-time vs part-time) - Geographic location (salaries vary significantly by region) - Company size and revenue - Your experience level and qualifications The IRS uses a "facts and circumstances" test, so you want to show you considered multiple factors. I'd recommend pulling data from 2-3 different sources and documenting why you landed on your specific amount. For your situation, $36k for someone with your income level sounds reasonable, but make sure it aligns with what someone doing similar work in your area would earn. The IRS gets suspicious when S-corp salaries are either extremely low (obvious tax avoidance) or unnecessarily high (which defeats the purpose of S-corp election). Your CPA should help you compile this documentation before filing the late payroll returns. Having it ready upfront shows good faith effort if questions arise later.

Great question about documentation! From what I've seen work well, the IRS tends to favor objective, third-party sources for reasonable compensation analysis. Here are some solid options: 1. Bureau of Labor Statistics (BLS) data for your specific occupation and geographic area 2. PayScale, Glassdoor, or Salary.com data (print/save the methodology pages too) 3. Robert Half or other industry salary surveys 4. If you have employees in similar roles, their compensation can be a benchmark 5. What you paid yourself in prior years when you did run payroll properly The key is showing you used multiple sources and considered factors like: - Geographic location (cost of living adjustments) - Years of experience - Education/certifications - Hours worked (if part-time vs full-time) - Specific responsibilities and skills required I'd lean toward being conservative rather than aggressive - it's better to pay a bit more in payroll taxes than to have the IRS challenge your entire structure. Most CPAs recommend staying within the 25th-75th percentile range of comparable positions to avoid red flags. Document your research process and keep all the source materials. A simple spreadsheet showing the different data points and how you arrived at your final number goes a long way if questions come up later.