Level 3

1099 NEC can it be used to pay and S-Corp owner as salary at year end

Forum|Forum|3 years ago
October 16, 2022
5 replies
36 views

Hello everyone,

I have an S-corporation customer, and both husband and wife run a trucking business. They have filed their 1120S forms with the IRS. They were issued a K1 and 1099NEC (weekly salary payments ). I would like to know if the issuance of the 1099-NEC for purposes of paying themselves is correct.

This topic has been closed for replies.

dkh

Level 15

I would like to know if the issuance of the 1099-NEC for purposes of paying themselves is correct.

No.

J

jadira1021Author

Level 3

Hi,

This is what I thought after reading on this topic but I was confused as an article I read stated that a shareholder-employee can choose to receive a salary as either an independent contractor or an employee. Another article mentioned that an S-corp offers business owners three basic options for paying themselves: by salary, distributions, or both. But that the right choice depends largely on how the owners contribute to the company and the company's finances. I also read that owners of S-corps who have a hand in daily operations fill two roles: one as a shareholder and another as an employee. However, owners who do not oversee daily operations are classified only as shareholders, and the role an owner plays in their company directly affects how they get paid under the S-corp structure.

I did not prepare the 1120-S tax form the customer used their tax accountant. They wanted me to prepare their personal taxes claiming K1 and 1099-C, and the 1099-NEC (salary they got paid).

qbteachmt

Level 15

"Another article mentioned that an S-corp offers business owners three basic options for paying themselves: by salary, distributions, or both"

Where you read this must have been ancient. First, a non-working shareholder and a shareholder-employee get K1 from the entity. You never get a 1099-NEC from your own entity. The working shareholder is an employee and gets Reasonable Compensation for work performed as Payroll. The IRS is cracking down on that. You are not a contractor to your own entity. There is no draw, nor distribution in lieu of payroll.

Don't yell at us; we're volunteers

dkh

Level 15

Just out of curiosity......Did this client prepare their own 1120S return but want you to complete their 1040 return?

J

jadira1021Author

Level 3

Their tax accountant prepared their 1120S.

IRonMaN

Level 15

I hope they never get audited and you are forced to defend their position. Your comment of “(weekly salary payments)” would make it one of the shortest audits on record😉

Slava Ukraini!

BobKamman

Level 15

Now that "what shoulda been done" has been covered, let's get back to "what to do now." The whole purpose of requiring S corps to pay owners for their work is to prevent evasion of Social Security taxes. If the amount on the 1099-NEC is reasonable and reported on a Schedule SE, IRS has nothing to complain about. They might not have found out about what they should have done in 2020, until 2021. At that point, someone made the decision to avoid penalties on late-filed 941's by using the 1099-NEC instead. Considering the IRS backlog of unprocessed 941's, that may have been doing the government a favor.

What they should do now -- what they should have started doing already -- is report wages on payroll tax returns. That includes state reporting requirements; they're also evading unemployment taxes. Meanwhile, get the 1040 filed. Unless you're in a disaster area, you're already late.

Speaking of RCReports, here is their take on the issue, which admits that sometimes an S Corp can 1099 an owner:

https://rcreports.com/resources/reasonable-compensation-blog/1099-or-w-2-for-shareholder-employees-of-s-corps-updated-for-199a-2/

The example they give is real estate agents. But as I noted earlier, there might be a case where an OTR truckdriver can claim the special status. That's a big issue these days in the "employee vs. IC" debate in California, for example.

IRonMaN

Level 15

"If the amount on the 1099-NEC is reasonable and reported on a Schedule SE, IRS has nothing to complain about."

They don't care about federal unemployment taxes or about getting that money faster than they would if a payroll check was being issued? I guess the IRS is getting to be a much kinder, gentler organization. What about the state? They aren't interested in collecting some additional unemployment taxes? You would think they could use a few extra bucks after that little COVID deal.

Slava Ukraini!

BobKamman

Level 15

Did I say the state had nothing to complain about? My state starts new employers out at a 2.7% rate on the first $7,000, so the amount involved here for two people is less than $400. If they ask for it, then pay it. The point is that it's not going to get any better by filing 2021 quarterlies in late 2022.

The power went out at my office yesterday afternoon -- maybe showing solidarity for Ukraine -- so I went and got a haircut. My friend, client and barber told me about the 87,000 armed IRS agents that are on their way if the socialists get re-elected. Since IRS relies on fear as the pillar of its compliance program, the increased budget may already be serving its purpose. But the truth is out there:

"In the past, the IRS audit rate for partnerships and S corporations has been very low—around 0.05% (or one out of every 200 returns). This audit rate is one-half the rate for individuals and one-quarter the audit rate for C corporations. In addition, about 50% of all partnership and S corporation audits in the past resulted in no changes to the tax return."

https://www.hsdtaxlaw.com/irs-audits-of-partnerships-and-s-corporations-are-coming-are-you-ready#:~:text=In%20the%20past%2C%20the%20IRS,audit%20rate%20for%20C%20corporations.

In the unlikely event of an audit, what they owe isn't going to be any worse than if they try to put the toothpaste back in the tube today. What's important, even IRS will admit, is to get them into compliance for 2022 and future years.

C

cnd10

Level 2

They should be receiving W-2; they are considerted emplyees.

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