Self employment tax?

[natiro]

My client, an attorney, is a former employee and shareholder of a local law firm (C-Corp). She opened her own practice earlier this year (S-Corp). As part of her agreement with the former firm, she took her receivables, invoiced her clients, collected the fees, and then paid her former firm 10% of her collections. Since this income was not earned in her S-Corp, she did not invoice for these fees through her corporation.

Are her collections subject to self employment tax?

Many thanks!

[veritas]

Were the receivables

given in exchange for her stock?

[natiro]

Self employment tax

No, the stock buy out was separate.

The original agreement regarding the receivables was that she would prepare final billings for the WIP, the firm would send them out and collect on the A/R and then would withhold their % before paying my client the net. My client negotiated to send the invoices out directly herself, collect on the A/R and then pay the firm their %.

The income was earned while she was an employee, but her billings were prepared and mailed, and collections were made after she left the firm and started her own practice. As I mentioned earlier, she has treated these transactions separely from her own S-Corp income.

By the way, her former firm folded a couple of months after she left so this was a good move all the way around!

[Roland Slugg]

Yes ... S-E income

If her former firm had collected those receivables then paid her some or all of the amount collected, in the form of salary, there would have been FICA deducted therefrom. Since that income bypassed the old firm, it is SE income to her. Keep in mind that the income was for services rendered.

A question you did not ask, but perhaps should consider, is this: Does the FMV of the receivables she was allowed to bill and collect constitute proceeds from the sale/redemption of her C Corp shares?

[taxea]

Self employment tax?

If the W-2 from the old company did not include wages for this work then it appears they were treating her as sub-contract and not an employee in which case she could file Sch-C for SE purposes since it was not included in the new S-Corp. taxea