Sole Proprietor with W-2

[lenboush]

I have a new client who is a single member LLC who has NOT elected to be an S-Corp. He has been paying himself and reporting the income on a W-2 since 2007. I am having difficulty convincing him that this is not the right way to report sole proprietor income.

I have searched every resource I can think of and can find nothing from an authoritative source to show him that specifically states that a sole proprietor should not treat himself as an employee.

Can anyone here provide a specific cite for this situation?

Also, how have you handled such a situation if you have run into it before?

THANKS!

[Roland Slugg]

I have seen partners of partnerships do the same thing. I don't know what else you can do other than keep telling him that a business's owner is NOT an employee, and that a W-2 for himself is improper. If he reported his "wages" on F-941 and F-940, he's going to have a mess straightening it all out.

[Larmil]

I have a new client who is a single member LLC who has NOT elected to be an S-Corp. He has been paying himself and reporting the income on a W-2 since 2007. I am having difficulty convincing him that this is not the right way to report sole proprietor income.

I have searched every resource I can think of and can find nothing from an authoritative source to show him that specifically states that a sole proprietor should not treat himself as an employee.

Can anyone here provide a specific cite for this situation?

Also, how have you handled such a situation if you have run into it before?

THANKS!

I have had the same situation for several years (10+). I take the wage deduction on the Sched. C and report the W-2 income since inherited client would not budge. No problems thus far.

[RitaB]

You might try this

Also, how have you handled such a situation if you have run into it before?

I ran several articles I found online. Also, I pointed out that he was paying SUTA and FUTA unnecessarily.

[Burke]

And that can be a substantial expense depending on your state's rates. So, is he paying SE tax on the net LLC profit as well as his W-2 income?

[taxea]

I ran several articles I found online. Also, I pointed out that he was paying SUTA and FUTA unnecessarily.

If SUTA and FUTA are non-profits he could write it off as donations...I can only imagine cleaning up this mess and trying to get his money back

[S T]

Found maybe

Lenboush
Take at look at this thread post from another forum - It might give you the material you looking for - you have to go about 2/3 of the way down on the thread.

http://www.taxalmanac.org/index.php/Discussion:Single_Member_LLC_owner_draws/payroll

See Pub 334 and Pub 15 as well

Sandy

[MilTaxEA]

Quote

http://www.irs.gov/publications/p334/ch08.html

"You cannot deduct your own salary or any personal withdrawals you make from your business. As a sole proprietor, you are not an employee of the business."

(I got the reference from the TaxAlmanac link above)

[Burke]

Think about it. If someone deducts his salary from a Sche C business, he most likely is also deducting the 1/2 of employer-paid SE taxes he is paying on behalf of himself from the gross business income, which lowers the SE tax when you get to that point. Wrong.

[joanmcq]

Not only is he paying SUTA & FUTA unnecessarily, he wouldn't be able to file unemployment if his biz went under.

Stupid stupid stupid.