Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles has been in existence for five years and has earned a profit every year. Loretta withdraws $100,000 cash from the S corporation each year. As a result of an audit, the IRS asserts that $75,000 of the cash withdrawal should be considered a salary payment to Loretta. What are the payroll tax consequences of this recharacterization?
A) No payroll taxes will be owed as a result of the audit.
B) Loretta and Country Collectibles will each be liable for unpaid payroll taxes as a result of the audit.
C) Only Loretta will be liable for unpaid payroll taxes as a result of the audit.
D) Only Country Collectibles will be liable for unpaid payroll taxes as a result of the audit.

Question

Quizplus · Accepted Answer

The recharacterization of $75,000 from a cash distribution to a salary payment would result in payroll taxes being owed by both Loretta and Country Collectibles. Loretta would owe FICA taxes on the additional salary amount, and Country Collectibles would owe the employer's portion of FICA taxes and possibly other payroll taxes on the salary payment. The unpaid payroll taxes would be the responsibility of both Loretta and Country Collectibles.

Loretta Is the Sole Shareholder of Country Collectibles, a Calendar