ForumsTaxes and Payroll

Reporting S Corp officers' comp on a 1099 is rarely acceptable. The severity of the issue is of course driven by the dollar amounts involved.

Feel free to contact me with any questions.

Actually, you deduct the employer half of self employment tax the same as you would the employer portion of FICA. It is tax neutral. Paying on a 1099-MISC and paying SE tax is better than taking only distributions and no wages. It is just the wrong way. It ends up having the same result unless you start trying to write off bogus non business expenses, which a lot of people try to avoid paying the SE tax.

Using distributions to avoid payroll taxes is an IRS hot topic for S Corps. If the business is profitable and you perform management level services beyond what an investor in a business with non owner management would do, you need to take a reasonable W-2. If you are the only shareholders and officers, you need to take some W-2 wages. It doesn't have be a lot, but nothing is the worst thing you can do. If you take nothing, more likely than not EVERY dollar of distributions would be reclassified as taxable wages for every year that is open to audit (usually three years).

If you take no moeny out of the business outside of legit business expense reimbursements, you have no issue. It is only when non FICA taxable cash comes out to you that you have a problem.

If you paid your SE tax and didn't try to write off garbage like inappropriate home office deductions, bogus mileage or taking your family to dinner, you should be in ok shape. You might get audited, but if the net tax that you paid is equivalent to what you would have paid on a W-2, the auditor will likely pass on any adjustments. Substance would likely prevail over form.

The ideal form would be to reimburse yourself for as many legit documented business expenses as possible first, then take a small but reasonable W-2 for at least one of you. Then the remainder of cash taken could be the type of distribution mentioned.

However, I definitely second the importance of keeping up the corporate minute book. One of the most annoying things is giving an auditor three years worth of minutes are resolution hoping the still wet ink doesn't smudge.

My contact info is in my profile. Please feel free to contact me if you aren't sure how to go.

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"They set me up as an S corp and said that is alright to pay my wife and myself with a 1099 since all we do is professional services for the business..." I interpret that to mean more than no work is being done.

I apologize if it sounded like I was making an accusation. The path you suggested is prone to serious abuse. Some intentional and some as the result of bad or incomplete advice sometimes advice from other business owners. It is usually something like,"I was at a network marketing seminar and the speaker said...." I give the benefit of the doubt that they understand their businesses, but it is abundantly clear that they don't they shouldn't be giving tax advice to others when you hear it.

I did check out the website. It was very interesting. I am curious who is making tax related recommendations and interpretations. I don't see anything on that.