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941-x

hammadlatifeh
Level 3

Hello every one,

I have a client who I started with last July, through QB, this client is a self employed, but he paid himself as an employee through QBpayroll program, now QB paid the IRS the employee taxes by deducting half from the pay check, and half from the company, so what should I do now, please bear with me, I'm really clueless. I'm his accountant, and I'm planning on filing his returns, I've done all the hard work, and I don't want someone else to take over my work, the other thing, where should I put this paid taxes under, I mean doesn't this count as prepaid taxes, so it's suppose to be deducted from the tax he owes, not from his income as a tax expense.

Thanks a lot

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qbteachmt
Level 15

"Every thing was paid through quick books payroll program"

There are different ways to "do payroll" through the program. That includes Assisted Payroll, or Enhanced Payroll. Specifically, "someone" actually "did" payroll. Someone ran the numbers, handled the funds, paid in taxes, did the reporting, etc.

"and what I've done put these taxes under taxes expense"

But now you know that is Wrong, so it is time to fix it. Paying it through payroll is a functional error; putting it as Expense is a financial reporting error. That would make this two errors.

"what made me think that I'm wrong, cause this should be deducted from the tax he owes, not from the income."

Nope.It's not deducted from tax he owes. It has nothing to do with his taxes at all. It's just a Big Mistake and it needs to be addressed before you try to work on Business taxes for this person, and before trying to work on Personal taxes for this person. Because everything is wrong: Expenses, taxes paid in, and W2 are all wrong.

Taking funds from the business not for business needs makes it Draw. As I pointed out, one easy way is to treat it all as Draw. The other way is to treat some of it as Draw and the Employer tax component as Other Asset, and now that requires you to split the refunds accurately, to return to him only the Gross Payroll portion.

And Gross Payroll requires that you understand the amount paid in for taxes is not fully Tax Expense and not fully Owner's funds. This is Payroll Math:

Gross wages minus Employee share of taxes held as liability = take home. Then, employer share of taxes are part of liability. Later, by the due dates, all taxes are paid as clearing the Liability; not as Expense. That's why you need to understand payroll and how to unwind this mess. The taxes paid are Errors; they are not "his" taxes.

"I really appreciate your answer, so right now let's say he didn't file form 941"

Okay, but did the tax payments get sent or not? Not reporting is not the same as Not Depositing.

"cause when I asked him about it he said, he never heard of it, or filed it"

Then it seems likely he is not using Assisted Payroll.

"anyway the last payment for him as an employee, was in July, since then I've been his accountant, and I don't recall him filing for any thing"

It still needs to be amended.

"I'm really sorry for the trouble, but If you are a tax expert, or you know to solve this dilemma, I'm willing to pay you."

You posted in the ProConnect software forum for peer users of tax preparation programs for clients' income tax returns. I gave you a link to the QB Community, which is the same concept as Peer Community, but for a different need.

You don't need a Tax Expert. You need to amend the payroll and fix the accounting and deal with the refunds that you need to apply for as part of reversing the mistakes that were made. If this is all new to you, it is time to find a mentor on this issue so that you can learn from it.

*******************************
"Level Up" is a gaming function, not a real life function.

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8 Replies 8
BobKamman
Level 15

It's not so much what you should do, but what IRS should do, is to issue a Revenue Ruling that says this is perfectly acceptable and a good way to encourage voluntary compliance.  That makes too much sense, though, so it seems you are on the right path with your subject line:  File amended 941's, backing out his "wages" and withholding.  It may take a while to get the refunds, which he will need to pay his 1040 taxes.  File an extension and hope the dust settles by October 15.  Have the W-2 and 940 already been filed?  Those should be amended also.  If he is the first client you lose because you didn't catch this soon enough, make sure he's also the last.  

hammadlatifeh
Level 3

Thank you so much for replying so now my next step is to file 941x, we’re not going to wait for the refund to pay 1040 taxes, but in this case how should I categorize the taxes he paid already, should I post it under taxes and fees or under payroll taxes. This is really important. Thanks again for your help 

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qbteachmt
Level 15

"but in this case how should I categorize the taxes he paid already"

It depends on what you want to have happen when the refunds arrive. Let's assume the owner will keep all the money when it comes back to the company.

Let's understand that Payroll Expense is Gross Wages + Employer share of taxes.

The Wage expense account and the Payroll Tax expense account need to be changed to Equity type; then you can merge them into Draws.

Make sure to fix Jan 2021 and to confirm there are no Payroll Liabilities waiting to be paid.

Also,

Please visit the QuickBooks Help site for the answers to support your QB questions.

Thanks.

 

*******************************
"Level Up" is a gaming function, not a real life function.
hammadlatifeh
Level 3

Every thing was paid through quick books payroll program, and what I've done put these taxes under taxes expense, what made me think that I'm wrong, cause this should be deducted from the tax he owes, not from the income.

I really appreciate your answer, so right now let's say he didn't file form 941, cause when I asked him about it he said, he never heard of it, or filed it, anyway the last payment for him as an employee, was in July, since then I've been his accountant, and I don't recall him filing for any thing, I'm really sorry for the trouble, but If you are a tax expert, or you know to solve this dilemma, I'm willing to pay you.

Thanks 

0 Cheers
qbteachmt
Level 15

"Every thing was paid through quick books payroll program"

There are different ways to "do payroll" through the program. That includes Assisted Payroll, or Enhanced Payroll. Specifically, "someone" actually "did" payroll. Someone ran the numbers, handled the funds, paid in taxes, did the reporting, etc.

"and what I've done put these taxes under taxes expense"

But now you know that is Wrong, so it is time to fix it. Paying it through payroll is a functional error; putting it as Expense is a financial reporting error. That would make this two errors.

"what made me think that I'm wrong, cause this should be deducted from the tax he owes, not from the income."

Nope.It's not deducted from tax he owes. It has nothing to do with his taxes at all. It's just a Big Mistake and it needs to be addressed before you try to work on Business taxes for this person, and before trying to work on Personal taxes for this person. Because everything is wrong: Expenses, taxes paid in, and W2 are all wrong.

Taking funds from the business not for business needs makes it Draw. As I pointed out, one easy way is to treat it all as Draw. The other way is to treat some of it as Draw and the Employer tax component as Other Asset, and now that requires you to split the refunds accurately, to return to him only the Gross Payroll portion.

And Gross Payroll requires that you understand the amount paid in for taxes is not fully Tax Expense and not fully Owner's funds. This is Payroll Math:

Gross wages minus Employee share of taxes held as liability = take home. Then, employer share of taxes are part of liability. Later, by the due dates, all taxes are paid as clearing the Liability; not as Expense. That's why you need to understand payroll and how to unwind this mess. The taxes paid are Errors; they are not "his" taxes.

"I really appreciate your answer, so right now let's say he didn't file form 941"

Okay, but did the tax payments get sent or not? Not reporting is not the same as Not Depositing.

"cause when I asked him about it he said, he never heard of it, or filed it"

Then it seems likely he is not using Assisted Payroll.

"anyway the last payment for him as an employee, was in July, since then I've been his accountant, and I don't recall him filing for any thing"

It still needs to be amended.

"I'm really sorry for the trouble, but If you are a tax expert, or you know to solve this dilemma, I'm willing to pay you."

You posted in the ProConnect software forum for peer users of tax preparation programs for clients' income tax returns. I gave you a link to the QB Community, which is the same concept as Peer Community, but for a different need.

You don't need a Tax Expert. You need to amend the payroll and fix the accounting and deal with the refunds that you need to apply for as part of reversing the mistakes that were made. If this is all new to you, it is time to find a mentor on this issue so that you can learn from it.

*******************************
"Level Up" is a gaming function, not a real life function.

View solution in original post

hammadlatifeh
Level 3

Oh my God, I can't thank you enough, you really explained to me like no one, I'm so blessed to get a person who spent his time explaining it to me, God bless, and thank you so much

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BobKamman
Level 15

What @qbteachmt said.  Call it all Draw.  It's not clear whether the business has a "real" employee, for whom the Wages and other accounts would have to be kept.

I would interrogate question the client to make sure that he didn't set up an LLC and then elect to have it taxed as a corporation (S or otherwise).  You don't want to undo this twice.  

hammadlatifeh
Level 3

No, it's a sole proprietor, he just thought he needs to pay him self as an employee, so it's an honest mistake.

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