Expert: Arthur Naman - 1/29/2010

Question
I am an S-Corp with myself as the only employee.  Is it safe or a red flag to the IRS if I reduced my payroll for the 4th quarter 09 reporting because I have lost some business to the poor economy so I would lower my tax payment for that quarter?

Answer
If you are accrual basis, take the deductions for the year in the year in which the expense was incurred. Thus the payroll taxes should be taken in the 4th quarter. By "payroll taxes" I am talking about employer taxes since the employee taxes would be deducted also in the 4th quarter as that is the year the wages were paid.

If you are cash basis, then take the deduction in the year paid. That means the deduction for employer taxes would be taken in the year paid, presumably the 1st quarter of the following year when the taxes were paid. That depends on whether or not you made payments of payroll taxes through out the quarter.

Do NOT vary the year in which the deduction is taken depending on whether or not you need the deduction. Please just do the same think you do every year.

As for the question of whether or not a "red flag" is raised, that depends on a variety of factors.

If this is not clear, please ask a follow-up.