Gross Revenue
$1.26M
Net of $2,149 returns
Gross Margin
52.2%
COGS at $601,439
Net Income
$156,778
12.5% net margin
Total Payroll
$335K
Est. gross wages ~$304K
| Category |
Amount |
% of Revenue |
| Service Revenue |
$1,257,055 |
— |
| Returns & Refunds |
$2,149 |
0.2% |
| Total Revenue |
$1,259,204 |
100.0% |
| COGS — Materials & Supplies |
($581,548) |
46.2% |
| COGS — Contract Labor |
($19,891) |
1.6% |
| Gross Profit |
$657,765 |
52.2% |
| Payroll Wages |
($253,596) |
20.1% |
| Employer Payroll Taxes |
($80,929) |
6.4% |
| Utilities |
($37,410) |
3.0% |
| Merchant Processing Fees |
($30,951) |
2.5% |
| Occupancy Costs (Rent, Janitorial, R&M, Security) |
($44,497) |
3.5% |
| Insurance |
($13,324) |
1.1% |
| Taxes & Licenses (incl. Property Tax) |
($6,102) |
0.5% |
| All Other Operating Expenses |
($34,274) |
2.7% |
| Total Operating Expenses |
($501,083) |
39.8% |
| Other Income (CC Rewards) |
$634 |
— |
| Other Expense (Interest) |
($537) |
— |
| Net Income |
$156,778 |
12.5% |
COGS Composition — Updated
COGS now includes a new 5140 · Contract Labor line ($19,891) for off-payroll workers classified as direct labor. Materials & Supplies increased to $581,548 with Homestead Inc. confirmed as a supplier (not rent). Total COGS of $601,439 brings food + labor cost to 47.8% of revenue. The contract labor classification has 1099-NEC implications for any individual receiving $600+ (see compliance flags).
Key Finding: Books Understate Gross Wages
Payroll is processed through Paychex and recorded from bank-feed transactions. The 6800 account now shows $253,596 (includes $9,400 in manual wage checks added this revision), but this still represents net pay disbursements, not gross wages. The 6820 account ($80,929) bundles employee withholdings with employer taxes. Estimated true gross wages are ~$304K. This must be corrected with Paychex payroll reports before filing the 1120-S.
| Item |
As Booked |
Estimated Actual |
| Gross Wages (W-3 reportable) |
$253,596 |
~$304,000 |
| Employee Withholdings (FIT + EE FICA) |
— |
~$51,000 |
| Net Pay to Employees |
$253,596 |
~$253,000 |
| Employer FICA (7.65%) |
$80,929
(combined) |
~$23,300 |
| Employer FUTA + TN SUTA |
~$7,600 |
| Total Employer Tax (true) |
~$30,900 |
| Total Cash Out (unchanged) |
$334,525 |
~$335,000 |
Payroll runs biweekly (~26 periods) via Paychex, plus $9,400 in manual check payments to workers now coded to 6800. An additional $19,891 in contract labor is classified separately under 5140 · COGS - Contract Labor. Combined labor cost (payroll + contract): $354,416.
| Vendor Category |
Amount |
% of COGS |
| PFS / Hale — Primary Food Distributor |
$484,774 |
80.6% |
| PFG — Performance Food Group |
$39,432 |
6.6% |
| IPFS / PFS — Early-Year Distributor |
$32,512 |
5.4% |
| Homestead Inc. (supplier — confirmed) |
$9,139 |
1.5% |
| Grocery Stores & Other Materials |
$15,691 |
2.6% |
| Subtotal: Materials & Supplies (5010) |
$581,548 |
96.7% |
| Contract Labor (5140) |
$19,891 |
3.3% |
| Total COGS |
$601,439 |
100.0% |
Reclassifications Complete
Vollara LLC ($3,543) moved to 6942 · Janitorial & Cleaning. Home Depot / Lowe's ($1,687) moved to 6945 · Repairs & Maintenance. Remaining minor items — Hobby Lobby ($204), Bargain Hunt ($204), Big Lots ($152) — still in COGS pending clarification from client on whether these are décor, serving supplies, or non-business purchases.
Action Required
Reasonable Compensation
Estimated gross W-2 wages are ~$304K (Paychex) plus $19,891 in contract labor. Need Paychex reports to isolate shareholder-employee W-2 compensation vs. staff wages. If the owner is not on payroll or is at a nominal salary, this is a high-audit-risk issue under IRC §3121(d)(1) and Watson v. United States.
Action Required
Contract Labor — 1099-NEC Exposure
$19,891 in 5140 · COGS - Contract Labor paid via manual checks to individuals outside Paychex. If these workers are actually employees (controlled hours, tools provided, ongoing relationship), the business faces reclassification risk and back-taxes under IRC §3509. If legitimate contractors, 1099-NECs required for each individual over $600.
Review Needed
Tennessee F&E Tax
Tennessee imposes franchise & excise tax on S-Corporations at the entity level. The excise tax is 6.5% of net earnings (subject to TN-specific modifications). Need to confirm F&E return filing status and whether estimated payments were made.
Review Needed
Payroll Bookkeeping — Reclassification Needed
Paychex bank-feed booking issue persists. The $253K in 6800 still represents net pay (not gross wages) and the $81K in 6820 bundles employee withholdings with employer taxes. Requires Paychex payroll summary reports to rebook properly before filing the 1120-S.
Rent Identified — $26,000 / Year
6900 · Rent now shows $26,000 annually (~$2,167/month). This is 2.1% of revenue — on the low end of the typical 6–10% restaurant benchmark, but consistent with the Morristown, TN market. Occupancy costs (rent + janitorial + R&M + security) now total $44,497 or 3.5% of revenue.
Charitable Contributions — S-Corp Treatment
$4,602 in charitable contributions recorded as a business expense. For an S-Corporation, charitable contributions are a separately stated item under IRC §1366(a)(1)(A) — they pass through to the shareholder's Schedule A (if itemizing) and are not deductible at the entity level on Form 1120-S. This needs reclassification on the return.
Significant progress on uncoded transactions. Revenue adjusted down $21,200 (wire transfer reclassified). Contract labor ($19,891) and property taxes ($2,655) now have dedicated COA lines. Homestead confirmed as a supplier. Remaining items still require client clarification:
| Category |
Amount |
Status |
| Wire Transfer — Reclassified from revenue |
$21,234 |
Coded ✓ |
| COGS - Contract Labor (5140) — Off-payroll workers |
$19,891 |
Coded ✓ |
| Homestead Inc. — Supplier, coded to COGS |
$9,139 |
Coded ✓ |
| Off-Payroll Wages — Added to 6800 |
$9,400 |
Coded ✓ |
| Property Taxes (7040) — Jim Shanks, Trustee |
$2,655 |
Coded ✓ |
| Utilities — MUD & Morristown Utility |
$2,485 |
Coded ✓ |
| "Personal Expenses" — Checks to individuals |
~$13,935 |
Draws or reimbursements? |
| Johnson Family — Remaining checks (AP / Personal) |
~$8,344 |
Confirm purpose |
| Intercompany Transfers — x0712 ↔ x5343 |
$3,000 out / $2,000 in |
Balance sheet only |
1099-NEC Requirement — Contract Labor
The $19,891 in 5140 · COGS - Contract Labor triggers mandatory 1099-NEC reporting under IRC §6041 for any individual paid $600+ during the year. Based on our earlier transaction review, Freda Dalton ($2,796), Elise Garland ($2,121), and several others exceed this threshold. Need to confirm whether 1099s were filed by the prior preparer or Paychex. Failure-to-file penalties are $310/form under IRC §6721 (2024 rate).
| Line Item |
Estimate |
| Net Ordinary Income (per Updated P&L) |
$156,778 |
| Add Back: Charitable Contributions (separately stated) |
$4,602 |
| Add Back: Meals & Entertainment (50% limitation, IRC §274) |
~$3,918 |
| Estimated K-1 Ordinary Business Income |
~$165,298 |
| QBI Deduction (§199A) — Estimated at 20% if eligible |
(~$33,060) |
| Estimated Taxable Pass-Through Income |
~$132,238 |
Important Caveats
These estimates are preliminary and subject to adjustment based on: (1) ~$22K in "personal expense" checks still pending classification — if shareholder draws, no income impact; if business expenses, net income decreases further; (2) shareholder's other income, filing status, and itemized deductions; (3) reasonable compensation determination; (4) QBI limitations under §199A(b) W-2 wage/UBIA tests; (5) Tennessee franchise & excise tax; (6) payroll reclassification to gross wages (est. $304K vs. $254K booked); and (7) depreciation schedules not visible in this P&L.
The following items from the original scope of work cannot be completed from the P&L data alone and require additional documentation:
| Scope Item |
What's Needed |
| Identification of unfiled returns |
IRS Account Transcripts (via TDS/Form 8821 or Tax Pro Account); TN filing history |
| Assessment of penalties & interest |
IRS Account Transcripts; TN Department of Revenue notice history |
| Entity structure optimization |
Articles of incorporation; S-election (Form 2553) confirmation; related entity listing; operating agreements |
| Payroll reclassification & compliance review |
Paychex annual payroll summary; Forms 941 (all quarters); Form 940; W-2s/W-3; TN unemployment filings — to rebook gross wages and isolate shareholder W-2 |
| 1099 reporting compliance |
Vendor payment detail for all services $600+; existing 1099-NEC filings |
| Estimated costs to resolve |
Dependent on findings from transcript review and compliance assessment |
-
Client Questionnaire — Remaining Uncoded Items
~$22K in "personal expense" checks to individuals still need classification. Are these shareholder draws, employee reimbursements, or business expenses? Also confirm purpose of remaining Johnson family checks and intercompany transfers.
-
Obtain Paychex Payroll Reports & W-2s
Request annual payroll summary from Paychex showing gross wages, withholdings, and net pay per employee. Critical for rebooking payroll and identifying shareholder W-2 compensation.
-
Reclassify Payroll in QBO
Book year-end adjusting journal entry to restate 6800 to gross wages and move employee withholdings out of 6820 into liability accounts. Now includes the $9,400 in manual wage checks.
-
1099-NEC Compliance — Contract Labor
Identify all individuals paid via 5140 · Contract Labor and 6942 · Janitorial who received $600+. Confirm whether 1099-NECs were filed. If not, prepare and file with late-filing penalty exposure analysis.
-
Pull IRS & State Transcripts
Obtain Account Transcripts and Wage & Income Transcripts via TDS. Check TN Department of Revenue filing status for F&E tax returns.
-
Confirm Lease Terms
Rent identified at $26,000/year. Obtain the lease agreement to confirm term, any escalation clauses, related-party status (is the landlord an owner or related entity?), and whether there are additional CAM charges not yet captured.
-
Reasonable Compensation Analysis
Once shareholder W-2 is identified from Paychex reports, benchmark against industry data for Tennessee restaurant owner-operators at this revenue level.
-
Prepare Engagement Letter & Fee Estimate
Based on findings from steps 1–7, scope the full engagement and present a prioritized action plan with associated costs.
Disclaimer: This overview is based on the 2024 Profit & Loss (v3, updated with coded transactions), payroll bank-feed detail, and COGS transaction-level data provided. It is not a substitute for a comprehensive tax return preparation, audit, or formal opinion. All estimates are subject to adjustment upon receipt of complete financial records, Paychex payroll reports, tax transcripts, and supporting documentation. This document does not constitute legal or tax advice. Prepared by Endless Winning in partnership with Wood Tax Advisory.