Can Sole Proprietor Schedule C Business Pay self wages?

[renaudtax@gmail.com]

Can self employed sole proprietor that has company as an LLC and fills out Schedule C on 1040 pay themselves wages and give themselves a W-2? Or do they have to change to "LLC taxed as an S-Corp" and fill out the 1120S for business, do K-1, etc.?

[Lion]

SMLLC does NOT pay wages to sole member. SMLLC taxed as an S-corporation or a C-corporation DOES pay wages to employee/shareholder. Not just wages get treated differently in different entities, but things like health insurance too.

[Rapid Robert]

Can self employed sole proprietor that has company as an LLC ... pay themselves wages and give themselves a W-2

No, a sole proprietor cannot (legally) pay themselves wages. An LLC is a disregarded entity for federal tax purposes, so that has no bearing on the question.

More helpful advice might be forthcoming if you gave some indication as to why the sole proprietor would even want to take on the extra expense and other overhead of filing payroll tax and info returns.

[renaudtax@gmail.com]

Thank you both - and Rapid Robert - he just came to me as a brand new tax client. He started his company in 2019, got LLC and EIN and thought he was good to go. He paid a bookkeeper to do his payroll for himself and 941 filings - mainly to pay in throughout the year and avoid the SE taxes on 1040 and to avoid quarterly estimates. Can I make a request to IRS to back date the "taxed as an SCorp" option - and prepare 1120S for his company for 2019?

[ATSMAN]

He started his company in 2019, got LLC and EIN and thought he was good to go. He paid a bookkeeper to do his payroll for himself and 941 filings - mainly to pay in throughout the year and avoid the SE taxes on 1040 and to avoid quarterly estimates. Can I make a request to IRS to back date the "taxed as an SCorp" option - and prepare 1120S for his company for 2019

?

Unless you are also advising this client as his business lawyer, I would not do that. There are legal ramifications based on the type of business.

If this were my client I would use 941-X to correct the error.

[TaxGuyBill]

Can I make a request to IRS to back date the "taxed as an SCorp" option - and prepare 1120S for his company for 2019?

1. Was that what he intended?
2. Does he qualify for the late election?
3. Have you determined that is the best way for his business to be taxed?

Don't make the election just to avoid amending payroll returns. It needs to be what the client intended and what is best for the business.

[Scarecrow]

If I were an IRS auditor, I would disallow the deduction for W-2 wages paid, along with payroll taxes paid on the grounds that a sole proprietor paying himself or herself a W-2 wage is not an ordinary and necessary business expense. The sole proprietor would thus be subject to income tax and self-employment tax on the net profit that disregards the W-2 wage expense and payroll tax expense. I would not double tax the person on W-2 wages because I would classify it as owner's withdrawals. Nor would I give any credit to tax withholding on the W-2 because you can't withhold taxes on owner's withdrawals. I would say that the taxpayer would have to go through the overpayment of payroll tax procedures to recover any payroll taxes improperly withheld and deposited with the government.

The entity is also not a C corporation unless the taxpayer makes an election to be taxed as a C corporation.

As for the S corporation scenario, it might be more advantages to recover withheld payroll taxes than go through the S corporation scenario. The taxpayer has to follow all the corporation rules to be classified as an S corporation, and paying yourself a W-2 wage as a sole proprietor proves you are not capable of following corporate formalities.

Personally, I would not take on a client who charges ahead and operates a business without proper advice on how to do stuff. To me, such a client is too much of a headache as you can never be sure what kind of a stunt they are capable of pulling in the future.