USA Salary for officers of an S-Corp

[AnitaAmeen]

The tax accountant for our company indicated the officers can report their salary with a 1099 at year-end and pay quarterly taxes personally. The officers would take monthly withdrawals from the business (which constitutes their salary) and pay personal estimated quarterly taxes on this money. The tax accountant said we would not have to file quarterly tax returns because the Scorp is not withholding taxes. I thought all officers of an Scorp were required to have W-2 wages. Is the tax accountant making a valid suggestion?

 

[AnitaAmeen]

If we take the tax accountant's advice we will not be paying FUTA and our state unemployment tax. Additionally, we would not be filing 941's. I do not think this is the correct approach to paying officers of a Scorp.

 

[kirby]

You are correct. And there are many internet tax sources that confirm this.
But to resolve this, can you share what is your spot in the company? Junior acct? Owner? Because the proper approach to resolve this depends on your spot in order to protect your interests.

 

[CStanford]

The tax accountant for your company is wrong.

 

[CrunchyTaco]

As I understand it, if your officers only accept a 1099 for salary you open yourself up for both a federal and state audit (if you pay state taxes) since in an SCorp you MUST pay your officers a "reasonable amount" via a w2 and withhold FICA. You can then issue 1099's for the rest of their salary and avoid FICA on most of the salary, but somewhere in the neighborhood of 40% must be W2 if they're officers and not outside hired help.

 

[Vince]

You will not receive a 1099 for the shareholder distributions. This information will be identified on the K-1 the shareholders will receive from the S-Corp....and yes the shareholders are to be employees of the corporation, be paid a reasonable salary, etc.

 

[CrunchyTaco]

Exactly what Vince said.

 

[Vince]

As an addition to the audit issue described above. What can happen if the IRS picks up on the lack of payroll, the shareholders distributions will be considered subject to self-employment and also possibly 100% of each shareholders share of income from the S-corp on their individual tax returns regardless if distributed? (it happened to one of my clients...he had payroll, but his payroll was not HIGH enough?

 

[Ferdi]

The tax accountant for our company indicated the officers can report their salary with a 1099 at year-end and pay quarterly taxes personally. The officers would take monthly withdrawals from the business (which constitutes their salary) and pay personal estimated quarterly taxes on this money. The tax accountant said we would not have to file quarterly tax returns because the Scorp is not withholding taxes. I thought all officers of an Scorp were required to have W-2 wages. Is the tax accountant making a valid suggestion?

Check the Art of Inc, and Bylaws to see if Members, Officers and Directors are the same. If so, then yes they are technically not employees. However, if they are not the same people, and comes and works every day, then they ate employees, and should get w2. So answer is, it depends... thanks, TaxEsq

 

[CrunchyTaco]

Even if they're not technically employees, you'll need to provide them with a "reasonable" income via w2 or when you're audited they'll go after all that FICA you're dodging with k1s. Keep that in mind.