Assign income from sole proprietor to corporation

[Bees Knees]

The previous comments have indicated that the IRS has accepted such treatment after it was explained to them. That is much different than getting by with something just because it slipped through.

I doubt the explanation was: “The payer wanted to pay the individual and use the individual’s SSN rather than the corporate EIN because the payer had a contract with the individual and not his corporation. So we zeroed out the 1099-MISC on Schedule C and nomineed the income to the corporation because we wanted to save some SE taxes.”

More likely, the explanation was: “The payer mistakenly used the individual’s SSN rather then the corporate EIN. So we zeroed out the 1099-MISC on Schedule C and nomineed the income to the corporation.”

There is a difference. Of course IRS is going to accept the later explanation without challenging it short of an audit.

There might be some room for doubt in the situation under discussion if there was a contract with the individual and not with the corporation, but otherwise, I would think it would be appropriate to take a course of action to transfer the income to the corporation.

That is exactly the situation in the original post of this thread. Re-read it:

State Farm will not recognize his corporation and will continue to pay his commissions under his ss# based on how his contract is structured.

State Farm has a contract with the insurance guy, not the insurance guy’s corporation.

Gee wiz, people, read the context of this discussion before shooting from the hip. The payer refuses to recognize the corporation and insists on paying the individual. How much clearer does this case have to be????

Stare Farm: “WE DO NOT WANT TO USE YOUR CORPORATION EIN BECUASE WE HAVE A CONTRACT WITH YOU! NOT YOUR CORPORATION!!!”

Issue solved. It goes on Schedule C. Not his corporation!

[Burke]

Interesting court reasoning in T.C. Memo. 2005-256 cited by solomon:

http://www.ustaxcourt.gov/InOpHistoric/Arno5ld.TCM.WPD.pdf

There is your proof. You cannot form a corporation and assign the income to the corporation unless the payer has an arrangement with the corporation to provide the services.

Does this "arrangement" have to be written? Scenario: Contractor who performs work for client is requested to provide SSN for 1099Misc. Gives his SCorp FEIN. Refuses to give SSN even though payment was made to him personally. Says all his income goes thru SCorp. So payor who contracts with this person now writes checks to his SCorp even though he still personally performs work. No written contract that I am aware of. Am guessing here, but just based on the name of contractor's SCorp, it has nothing to do with the work he is performing under this "arrangement." It is my belief that by accepting this arrangement, the payor has put himself in a liability situation for failure to do backup withholding on this individual. BUT, the payor has no way of knowing whether this person draws a salary from his SCorp.

[luke]

Wow

What an interesting discussion - I HAVE a State Farm agent client that I have been doing the "nominee" distribution to her Corp for many years (I know that doesnt make it right...)
One point I would like to make to several of the previous posters - the wages paid to the agent from the corp would NEVER be equal to the 1099 because that 1099 income is being used to run the agency (rent, supplies, employee wages etc)

Years ago I had a retired state farm agent who got a 1099-misc every year (residuals from his previous clients?) - anyway I kept wanting fim to pay SE tax on 1099-misc - HE brought me a letter from IRS / State Farm (court case?) that made it clear that SE tax was NOT to be paid on these payments?

[solomon]

Years ago I had a retired state farm agent who got a 1099-misc every year (residuals from his previous clients?) - anyway I kept wanting fim to pay SE tax on 1099-misc - HE brought me a letter from IRS / State Farm (court case?) that made it clear that SE tax was NOT to be paid on these payments?

Actually, that is in the Code - §1402(k)

(k) Codification of treatment of certain termination payments received by former insurance salesmen

Nothing in subsection (a) shall be construed as including in the net earnings from self-employment of an individual any amount received during the taxable year from an insurance company on account of services performed by such individual as an insurance salesman for such company if—

(1) such amount is received after termination of such individual’s agreement to perform such services for such company,

(2) such individual performs no services for such company after such termination and before the close of such taxable year,

(3) such individual enters into a covenant not to compete against such company which applies to at least the 1-year period beginning on the date of such termination, and

(4) the amount of such payment—

(A) depends primarily on policies sold by or credited to the account of such individual during the last year of such agreement or the extent to which such policies remain in force for some period after such termination, or both, and

(B) does not depend to any extent on length of service or overall earnings from services performed for such company (without regard to whether eligibility for payment depends on length of service).

[Bees Knees]

Does this "arrangement" have to be written?

The court case did not say. I think in the scenario you mention, when the payer writes the check out to the corporation, then the payer has agreed to pay the corporation for the services rendered. Thus the payer has an arrangement or agreement with the corporation, and the corporation in turn has earned the income.

That is completely different than the payer saying, "No, I don't want to make the check out to your corporation and use your corporation’s EIN on the 1099. I have a contract with you. Not your corporation."

I think in most cases, having the payer make the check out to the corporation solves the issue. Usually the payer isn’t going to care, and so this really isn’t a big issue. This particular case that started this thread, however, is an exception, because the poster specifically mentions the payer refusing to acknowledge the corporation as the payee. The payer has a contract with the individual, not his corporation.