Expert: Arthur Naman - 5/12/2009

Question
My husband and I owned an LLC; I put him on the payroll; His salary is being deposited back to business account because of needed cash flow. I,myself does not take any salary. Did I commit a mistake when I put him on the payroll?  Could I just quit giving him anymore salary. I wonder if IRS could penalize us for the mistake. How would I report it?

Answer
So, you are reporting W-2 wages which are subject to income taxes as well as payroll taxes, both personally and for the corporation. Then the money is being returned to the corporation which is not a deduction. That is a net negative for you and your husband if I follow your facts.

The IRS will not penalize you, you did them a favor because your "mistake" resulted in increased taxes, compared with your paying or reporting any income.

Can you quit giving him salary, YES!! Based on the scenario you have presented.

Is your LLC a regular corporation, S Corp, or partnership?? What does the person preparing your annual tax return say about this?

You report the salary just like reporting any other salary - on an annual W-2.