Shareholder gives 1099 Misc to himself?

[taxxcpa]

1099 to shareholder

I have a client who issues himself a 1099 from his C Corp for over $ 100,000 and also 1099s to other "employees". They all pay self-employment tax. He reports the 1099 on his Schedule C from which he also has a lot of business expenses to deduct.

He pays no salaries at all.

He often shows a loss or very small profit on his corporation, but last year he ended up paying about $ 25000 tax on his corporation after deducting loss carryovers. He probably slipped up and failed to give himself a big enough 1099/

Once about ten years ago, he tried reporting his 1099 as a salary and dodging the self-employment tax. The IRS caught him on that one. Since then there have been no questions from the IRS, but he could be questioned if they ever really took a hard look at his tax returns.

[tacks]

...by just showing it all as S-corp distributions. You're running some risk of the S-corp being tagged for showing no officer salary, but in fact that is what happened. ...penalties & interest the corp may pay on the unreported salaries.

My thoughts about this were that i would classify $$ taken out as shareholder loan and compute interest income on the Corp side. This would prevent the flag of S Corp distributions with no officer salary. I would document (as best i could w/out committing fraud) the prior year loan agreement between shareholder and corp.

[tacks]

Thanks TaxCPA.

Helpful to know.

[JohnH]

If there aren't any existing shareholder loans already, you could book up to just under $10K without having to worry about interest.

It is an interesting situation. You might want to look at the transactions themselves and ask the client about their "intent" at the time the checks were written. There may be a good basis to split the baby on some of this stuff, although I'd keep in mind luke's caution about getting to aggressive with the EIC. That's an area that could come back to bite you in a big way (and it could be detrimental to the client, although I'm coming around to the idea that potential EIC problems need to be resolved with an eye toward minimizing the preparer's risk regardless of how it affects the client).

Crafting a compromise might mean a little more tax (or less refund) for the client now, but having a fall-back position might also be comforting. We like to maximize the client's benefit, but sometimes they get themselves into a mess that causes us to look over our shoulder while we're figuring out the best all-around approach.

[ChEAr$]

I have a corporate client [edit: S Corp] who made the mistake of not giving salaries to shareholders. They are a daycare center for low income families -- they receive state subsidies.

Would issuing a 1099-Misc to one of the shareholders for a modest amount throw up a flag? He did do a lot of renovations that the other shareholders did not do. He did take the money out. And it would give him an EIC.

(i know that we'd be filing the 1099s late -- possibly a late fee)

thanks in advance

Just an added note to replies below. Remember, shareholders do not receive either 1099's (except for corporate dividends) nor W's. Only is a shareholder is also an employee will he merit a W2 at the end of the year. If the shareholder is
an officer he is a de jure employee of the corporation and must be paid for his
time. However it is conceivable that a shareholder not an officer could receive a
1099misc for outside services, but never for on site work as a common law employee.

[Jiggers]

1099's to shareholder/employees

The problem with doing this instead of a W-2 is that the shareholder/employee is probably deducting expenses on a Schedule C.

An audit that reclassifies the 1099 as a W-2 will disallow the expenses deducted on a Schedule C and reclassify them to a 2106, subject to the 2% haircut.

Plus the penalties for not filing/paying the taxes by way of the 941 and payroll tax deposits. And the penalties for not filing/paying the 940 tax. And the penalties for not issuing the W-2 in the first place.

Not even considering the state penalties and taxes! And possible workers' comp issues. And if the shareholder/employee set up a retirement plan on that Schedule C income, there could be big issues and penalties.