All my income comes from my S-Corp, and I have been told that paying yourself as a 1099 is OK. I however decided to give me a W2 and manage my payroll. The problem with payroll is that you need to pay for the payroll service and pay social security and unemployment taxes. If the business is not doing that well, a 1099 and estimated tax payments will be a less expensive solution.
I hope this can help.
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.
I'm trying to figure out why this is not acceptable. As sole shareholder employee of an S Corp, aren't the taxes being paid the same either way I pay myself? What am I missing by paying myself via 1099 instead of W-2?
Hello. Ok, you are all tangled up. The first thing is that when you are paid with a 1099 that is "independent contractor" income. This means that you are going to pay "self employment" taxes on the income. This could be as high as 15.3%, depending on the amount of your other w-2 income. This is worse than paying yourself a salary and using payroll, because at least when you use payroll the business can write off half the tax to offset other income.
I am not suggesting that you use payroll to recieve income from the business. Because you don't "actively" work for the business you can receive what are called "distributions". A distribution is income that is not subject to "employment taxes"; the incorporated business version of "self employment taxes". This income is considered "passive" income, which is the benefit you recieve for owning the business. It is treated just like rental income for tax purposes. Basically label any income that you receive as a distribution.
Pass that I would also look into business tax deductions that could provide non-taxable income to you, and or pay for business related expenses that you could get personal benefit of, for example, business meals, etc.
Also, on another subject you may want to make sure that your "minutes & resolutions" are completed and in order. I have some free templates that I can send you if you would like.
If you would like more information, contact me and we can chat. Hope this helps!
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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Actually, if you do "no work" for the business and own it, it is NOT a red flag to the irs. It is a legitamate distribution. If you are doing work, then take a compensation that is adequate for work completed. And I would not recommmend that you use "bogus" deductions. See the tax information at www.expensementor.com, to make sure that you do not write off deductions that do not meet IRS requirements i.e., "taking your family to dinner" which is definitely not adviseible.
And w-2 wage, and 1099 income do not have the same tax outcome of passive income.
"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.
My simple advice, get another accountant period! Why on earth are you submitting your own income taxes when you are paying the accountant to do it? Good luck!
With Bank of America Online Banking for your business, you can sign up for the payroll service which has been free to my real estate firm (3 employees) since all 3 employees have BOA checking accounts and their paychecks from my business are direct deposited. I make the checking account requirement known when I hire an employee...I do not have much turnover in employees so it has not been a problem since the account is free to the employee also as long as they have the direct deposit of something into their account, etc. . If an employee does not have a BOA account for a direct deposit, the service only costs $20 a month in my area of Florida. Along with this BOA prepares W-2's for the employees, W-3 for IRS and the 941 form for Federal Payroll Taxes. You can keep track of your local unemployment taxes but it does not prepare the forms for the free account. I feel this is a good service and have used it for about 8 years.. They do have a deluxe service for a fee but the basic works for me and my real estate firm.
I am also an Enrolled Agent Sec 230 IRS and work at H & R Block year round by appointment. I would recommend that you get with your local H & R Block firm and look into the Peace of mind Guarantee (would not apply to the 1020S form for your Sub-S but would apply to your 1040). Had I known about this (Peace of Mind), insurance which is included in the price of the 1040 return if you go to a Premium H & R Block Office, I would have only used HRB. Years ago when I encountered errors on my tax returns, when I contacted the CPA doing my returns, I told them about the error and paid for an amendment!. There is also a guarantee at HRB if they prepare a return incorrectly they will re-do the return at no cost. Please go to HRB website and read up on Peace of Mind and the guarantee then contact only your local HRB Premium Office and ask to speak to one of their Enrolled Agents. This will give you a full time, year round person.
PS....You think you don't work for your business.... If you don't have a bookkeeper and you are processing invoices, checks, taxes for the biz and pay the biz bills... you are working for your business...the only difference is that you are working from a remote location..... Sounds like you are not taking much if any money out of your business and mostly paying others.....you are working but working for little. The others I am reading who only pay 1099 and say they are not working for their business if they like you do all those tasks...it would be hard to say they were not working for their business...
captgriggs this is why I always advise my tax clients to take time out to learn some of the basics of how business tax matters work. Also general consumers are often impressed with designations like CPA, etc., when in actuality that does not mean they specialize in small business.
What should have been taking place is that if you are an S Corp, you are an employee to your Corp and can pay yourself wages and withhold taxes, pay those taxes every quarter, etc. The wages you pay yourself are tax deductible to the business. This also applies to hiring your spouse. And even your children if you have, between the ages of 5-18. I discuss many of these business tax matters in my ebook "The Home Business and Small Business Tax Toolkit" found at http://www.smallbusinesstartupconsultant.com
Just in case anyone needs to fill out a Form 1099-S, I found a blank form here http://goo.gl/NlmMmh. This site PDFfiller also has some tutorials how to fill it out and a few related tax forms that you might find useful.
Thanks for the pointer!
Frankly I'm quite worried now. I've been with an accountant for about 3 years now who took over from the one I was with since I went into business 3 years prior to that, she reduced clients due to health. 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, live in another state from the business and we both work other full time jobs. The business has 2 other people that we contract the work out to. There's barely enough income now days to cover them, we pay ourselves every few months. The only reason we're keeping this thing alive is because, we have created and keeping 2 hard working Americans working in a struggling economy. Other than that, this whole thing would be history!
Basically, I found a alot of major errors in my tax returns (like companies that I didn't even work for) last so I used Turbo Tax and filed mine version instead of the accountants. I've been curious about other things when I ran across of these forums stating that what we're doing is wrong. Do I need some advice or are we doing it correctly?
My wife and I do not physically work at the company, we only process invoices, checks, taxes for the biz and pay the biz bills, that's it. If we have to go to a payroll system it will then increase the burden on us and increase the cost of doing business which the biz is already in a check to check status, I'm not sure if I can keep the biz open then.
Now as for the accountants continuing to file us this way, whats up with that? Can they be held responsible if we get in trouble? That's why we pay accountants for their services, to know the laws. If I knew all of the laws, why would I need to pay them $1200 - $1600 a year?
Any advice is greatly accepted!!!