Schedule K1 and 1099

[TheGoodnShawn]

Good day Good People.

I have a tax issue involving a married couple. The husband works (W-2) and is self employed as well (Schedule C). The wife was working as a self employed dentist (1099)

October 1, 2005 the couple bought out the practice that she was working for and created a S-Corp.

The previous year I worked they're taxes and completed the Sch C...but this year they had a business accountant work the dentist office and I prepared the individual portion. She was given a 1099 in the name of the Previous owner from the time period Jan 01, 2005 through Sept 30, 2005. She also received another 1099 to herself from herself for the time period in which she owned the company....Oct 1 through Dec 2005. And she also received a Schedule K1.

I was fine with the first 1099 and the Schedule K1, but I was sort of baffled to see that she had a 1099 for the same period of the K1 in which she owned the practice. I asked the clients about this, and they said they receive the second 1099 because she wasn't taking her salary out in a regular payroll....

Does anyone have any suggestions as to how to handle this?

Thanks in advance for your help

Shawn

[sea-tax]

Shawn if I undertand you correctly your client got 1099 for work performed by old owner and then K-1 and 1099 by her own s-corp.

You are correct then that this is not exactly Kosher . Most likely because she reported no payroll which she should have the s-corp accountant figured that instead of ammending payroll reports and paying any penalties and interest he would report what should have been wages as 1099 income. This basically achieves the same result as ammending payroll reports.

While I admit that this is wrong and I would advise client not to proceed as such in the future and that she needs to take payroll , I would probably report the income as it stands and let her know that if audited she could be liable for some penalties and interest.

Note of caution : If she is trying to setup any kind of pension plan or retiremetn plan for the year in question I would certainly chnage my opinion. I would make her fix the payroll reports and get w-2. Why? Because while se tax and w2 income are similar they are not exact when it come to calculating retirement contributions.

[TheGoodnShawn]

Thanks for your response...

I appreciate your time, but you nailed it on the head. I was just sitting here saying to myself that this just isn't right, but your response makes me feel a whole lot better

Thanks