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Payroll NRP continues, S corp NRP waits in the wings

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in Office Management,Payroll Management

The next 2,000 Forms 941 (filed between 2008 and 2010) to audit as part of the IRS’ National Research Project (NRP) have been selected and all audits are open, said Faris Fink, commissioner of the IRS’ Small Business/Self-Employed Division.

NRP audits are intensive, line-by-line audits intended to give the IRS baseline compliance data for future enforcement efforts. Good news: Fink said that the Payroll NRP has shown high rates of compliance, but problems have become evident—notably, problems involving company cars.

Company cars. For an employee, getting keys to a company car may be the perkiest perk of all, but not for you. Payroll must tax employees’ personal use of company cars and business miles they don’t adequately substantiate under the accountable plan rules.

How you tax employees is up to you. You could ditch all tax calculations and treat all of employees’ use of company cars as personal and, therefore, taxable. Employees figure their deductible business use on their own. Or, you could use one of two lease valuation methods:

  1. Under the general lease value method, determine the lease value by figuring out how much it would cost to lease the car from a third party.
  2. Under the annual lease value method, use an IRS table to determine the lease value (see IRS Pub. 15-B).

Once the lease value is set, multiply it by the percentage of personal miles driven out of total miles to get the taxable amount.

S corp NRP. Later this year, the IRS will identify the issues the S corp NRP will cover, according to Fink.

Nevertheless, one issue the IRS is always interested in is S corp shareholder-employees’ FICA-taxable salaries versus FICA-free distributions. Rule of thumb: S corp shareholders’ salaries must be reasonable. What’s reasonable: Reasonableness is a flexible concept, but it can bend only so far. It would be plainly unreasonable to pay, say, $25,000 in FICA-taxable salary and more than $100,000 in FICA-free distributions.

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