Obviously the S Corp owner is handling this wrong.  But our job is to best resolve the issue and file a return.  I would prepare the return and report all the net income as officer compensation (resulting in $0 net S Corp Income) and report the "officer compensation" as Self Employment on the individual return with no deductions.  In both cases I would disclose the treatment in the tax return.  While not correct, at minimum is get's the FICA and MC tax paid, does not result in any S Corp net income tax benefit, and handles the issue with the exception of a few minor payroll taxes and a lot of payroll tax forms.  The client should sign a disclosre and indemnity agreeement.  I have not been able to find such a case taken to the tax court.  At minimum, it should reduce the penalties for late payment of tax.