Corp gives 1099 to Officer?

[Skate1968]

A C Corporation shows no dividend, no profits and no salary expense. But the Corp pays 11,000 to the 100% shareholder and reports it on a 1099.

I would imagine that the IRS would jump on this immediately. What are the chances of this NOT drawing IRS attention?


By the way i'm not involved with this person. He went with another accounant. And that's OK with me.

thanks for reading


background (if you're interested):

http://www.thetaxbook.com/forums/showthread.php?t=4857

[JoshinNC]

What are the chances of anything on a tax return drawing the ire of the IRS?

A C Corporation shows no dividend, no profits and no salary expense. But the Corp pays 11,000 to the 100% shareholder and reports it on a 1099.

I would imagine that the IRS would jump on this immediately. What are the chances of this NOT drawing IRS attention?


By the way i'm not involved with this person. He went with another accounant. And that's OK with me.

thanks for reading


background (if you're interested):

http://www.thetaxbook.com/forums/showthread.php?t=4857

I remember reading that the average C corp only has a .5% chance of being audited anyway. But, this would be a red flag, I think.

[Joe Btfsplk]

Corp 1099

I have a client who has been doing this for years. He takes commissions based on sales which amount to around $100,000 per year and it results in a loss by the corporation.

His corporation is a C Corp. Several years ago he reported the 1099 as a 'salary' (paying no social security) and the IRS billed him for self-employment tax. He then continued issuing a 1099, but reporting it on Schedule C and paying the SE tax.

The IRS probably would not be too concerned if he pays the SE tax. They have not questioned my client since he began paying the SE tax.

[Skate1968]

Thanks for responding guys.

[OldJack]

The IRS gets upset with the idea of a C-corp employee getting a 1099Misc even if it is reported on 1040 Sch-C with SE tax paid. The reason is that it effects other things, mainly the payroll taxes including federal unemployment tax and the possible double tax of a C-corp.

It is possible for an officer/shareholder/employee to provide an independent service to the C-corp that is unrelated to his position as an officer/shareholder/employee and therefore receive a 1099Misc. Example would be for legal service by a lawyer, CPA services, Real Estate Sales Commission, etc. I doubt that a commission on sales or profit would fall into that category.

It would be common for the IRS, on audit, to disallow a 1099Misc to an officer/shareholder/employee as by definition an active officer is a corporate employee. The results could probably be one of 2 options:

(1) reclassified as wages with the normal payroll taxes, federal unemployment tax @ 6% since no state unemployment was paid, plus 25% max penalties for not filing and paying. Sure the FICA+Medicare equals the SE tax but its the penalties and unemployment that add up.

(2) reclassified as taxable dividends where the dividend is not deductible by the corporation, therefore the C-corp owes more income tax with penalties and it still taxable to the individual. The IRS agent would love to disallow the 1099 if this also could effect Personal Service Corp max tax calculation at 35% rate.

Then there is the fact that the IRS usually audits the 3rd year just before the statutory period expires. The taxpayer may or may not have time to file an amended tax return to get a refund of his SE tax and his refund period may have actually expired.

Truth is the taxpayer taking a 1099Misc may be taking a huge tax risk.

[Skate1968]

Thanks Jack!

This guy will be doing payrolls going forward.