Shareholder paid as independent contractor

[DaveinTexas]

I have a client who is a 100% owner in a S Corp. He currently works for a mortgage service company who pays him as an independent contractor for the loans he closes, a standard practice.

Could the S Corp initiate a work for hire contract with the single shareholder as an independent contractor and pay him say $500 per loan closed?

If the standard business practice is to pay independent mortgage brokers NEC, then I suppose it is fair for my client's corporation to compensate him in the same manner. My goal is to make this as simple as I can for the client and to avoid getting him in hot water with the IRS at the same time.

Do you guys think that this is too aggressive? All he is saving is FUTA and SUTA which comes to $291 per year, but also he is saving the hassle of doing payroll.

TIA

[Gretel]

I don't think you can do that. The corporation should get the 1099, put shareholder on W-2 as employee. You never want to have no W-2 compensation in an S-Corp.

[Joe Btfsplk]

Agree, but...

I don't think you can do that. The corporation should get the 1099, put shareholder on W-2 as employee. You never want to have no W-2 compensation in an S-Corp.

I agree, but if he gives himself a 1099 for almost all of the profit, the IRS probably won't complain. I have a client who does that for a C-Corp he owns 100%, and the IRS has accepted it for several years. He pays self-employment tax and reports the 1099 income on Sch C.

[Gretel]

Maybe IRS does, but State Unemployment will not go with this.

[ChEAr$]

That's not the way to do it.

I agree, but if he gives himself a 1099 for almost all of the profit, the IRS probably won't complain. I have a client who does that for a C-Corp he owns 100%, and the IRS has accepted it for several years. He pays self-employment tax and reports the 1099 income on Sch C.

The 100% shareholder who works for the corporation as only employee has to take a
salary and may not use the old 1099 route. Only reason IRS hasn't "complained" yet, is
because they haven't audited yet.

any time you have an S corp, a reasonable salary must be paid with all attendant taxes,
suta and futa.

Even in your scenario of a C corporation, it's not appropriate.

[Matt Sova]

Corp Officer

An officer of a corporation is an employee by law, be it an S or C Corp. He should take a reasonable salary and the rest could be distributions.

[OldJack]

Maybe IRS does, but State Unemployment will not go with this.

I agree with Gabriele on the federal (FUTA) and state unemployment tax that is not being paid!

Truth is on audit you probably can't justify that the shareholder of his 100% corporation (C or S) is an independent contractor as defined by the IRS. Just because one IRS agent turned his head is no assurance that the next one will (you can't claim prior approval unless it was an issue on audit). What some other company did with this shareholder is irrelevant. Its not that the payroll tax and SE tax difference would be significant if reclassified as an employee... it is the penalty that can and have been assessed against the S-corp in similar cases.

Another reason a 1099 is not a good idea, is the shareholder is not sheltering income and taking advantage of the fringe benefits of being an employee of a corporation.