LLC with S corp as partner

[Barb132130]

I am working on a return for a client who formed an LLC with himself and an s-corp as 50% partners. He is the sole shareholder of the s-corp. The LLC owns rental property, and up until 2013, this was the only income. In 2013 the LLC received a 1099Misc for over $40K(box 7), as my client is performing services for another business. He wants to allocate this income to the s-corp, most likely to try to avoid SE tax, which I don't believe he can do. However, since this income IS subject to SE tax, I am assuming that by listing it as ordinary income on the return, he will pay SE on his half of the income flowing from the K1. But what about the half that goes to the s-corp? Is there another way I should be reporting this income on the return?

[Lion]

He does need to take a reasonable salary from the S-corp, so that will get FICA and Medicare paid by the employee/shareholder and the S-corp employer. If the profit was the result of the employee/shareholder services (and not other employees, capital equipment manufacturing products, etc.) then a reasonable salary would be most of the profits from his services. He can certainly use the usual means of what would he pay someone else to do what he does or what salary would he take from an outside company to do that work and other research into trade organization studies on wages to help support his salary decision.

[Roland Slugg]

In your post you said that "your client is performing services for another business" ... "your client" being the individual. But you also stated that the LLC received the 1099-MISC form. It seems quite clear, then, that the 1099 was issued to the wrong payee.

This probably happened because your client gave that "other business" he performed services for the LLC's TIN instead of his own social security number, and that other business went ahead and used that TIN. You are probably correct about his motives ... to avoid SE tax.

If he, the LLC and the S Corp were clients of mine, I would advise him to request a corrected 1099 from that other company, issued with his SSN, not the LLC's TIN. But whether a corrected 1099 was issued/received or not, I would insist on reporting the entire $40k on Schedule C on his own return, not on the LLC's return. Anything else is fraud, IMO, exposing him to possible penalties under Code §6663(a) and his tax preparer to penalties under Code §6694(a).

[Burke]

I had somewhat the same situation. My client was the employer, and the independent contractor, who had personally signed an independent contractor agreement, refused to give his SSN, provided his S-Corp EIN & wanted the 1099 to go to that entity. The S-Corp was a completely different business holding rental properties, from his services to my client. My client issued all checks to him in his name during the year. After 2 years of arguing this point and several other items to no avail, I dropped the client. I issued the 1099 to him and put "not furnished" under the SSN.