S Corp shareholder filing both 1120S and Schedule C

[Auto]

I have a new client who is a S Corp shareholder. The former CPA filed a Schedule C on the personal return and an 1120S for what appears to be the SAME business. The 1120S shows $10,000 for line 7 Compensation of Officers. But there was no W2 issued, no pr returns or taxes paid. The Schedule C shows the $10,000 income and is also claiming the home office deduction, mileage expense and a few other small expenses.

Has any one ever heard of this.

[Lion]

Yes

Oh, I've heard of it. And, seen it; but that doesn't make it correct.

[Auto]

Irs

How is the IRS not picking up on something like this? Am I right in saying it is totally incorrect?

[BHoffman]

I've seen it done as a "correction" when the client fails to take a reasonable salary. By transferring the $10k to Sch C, the client pays some SE tax.

[geekgirldany]

Yeah as said by the others it is a way to make up for them to pay SE tax on some of the distributions to show they have a salary. One bad thing about doing it that was is no Futa or Suga tax is paid. Nope it is not correct. I had a customer that went to a accountant for 5 years and he always done his this way. I informed the customer the correct way to do it and he started payroll after that. He said he did not know he had to do payroll.

Let me add that I have never seen it where a OIH, mileage, and other expenses were deducted off the amount on the Schedule C. That is new to me and also very wrong.

[erchess]

Maybe some things I am not supposed to understand

But I don't understand why a CPA would do what was done in OP. It is not correct and it does not protect either the client or the preparer from future penalties. The course of action is a dis-service both to the "professional" and to the client. I have at times perhaps not researched some matter as fully as I might have but I do not think I have ever filed a return with knowledge that it was, not merely questionable but just plain wrong. I care too much about my clients and my professional reputation to do that. I believe that the CPA in OP has committed harm against someone entrusted to his care, and I believe that he will one day have to give answer to why he caused that harm to one he should have protected and assisted.

[Burke]

You do not state what type of business the Sub S or employee is in. This sounds like the way one would treat a statutory employee. (i.e, the W-2 wages go on the Sche C and expenses taken.) The situations where this is legitimate are limited, such as for certain insurance agents. But if no W-2 was ever issued, I don't know how the CPA could treat it as such. Plus such an employee WOULD be subject to FICA/MC by the employer. Sounds like he was trying to avoid all that. Amazing.

[Auto]

thanks for replies

Thank you everyone for your replies. When I see something another CPA has done, I tend to question myself with not knowing enough. God knows I don't know everything. But I've never questioned an S Corp shareholder's need to take a regular payroll and pay all those annoying pr taxes that go along with it. I must say, filing a schedule C and taking the full home office deduction was especially creative. I'm advising the client to take payroll. Whether she does or doesn't, she won't be getting a Schedule C from me. Thanks everyone for confirming the erroneous Schedule C for me.