2% S/H with 1099

[Gretel]

The question below brings up another question.

Can a 2% S/H get a 1099 at all? Is any 2% S/H subject to W-2's?

[DaveinTexas]

I think it depends on the relationship

If it is standard practice to pay a person working in a particular profession as an independent contractor: painter, specialty trade construction, licensed independent realtors, brokers or mortgage professionals; why should the IRS have any qualms about paying a 2% shareholder or a 100% shareholder of a S Corporation as an independent contractor. Facts and circumstances, of course, must be reviewed in every case so not every 100% shareholder will qualify as an independent contractor.

You could argue that a "reasonable wage" must be paid for other services that the shareholders perform such as: bookkeeping, managing the corporation daily activities, scheduling appointments, holding meetings, entering lease agreements etc. OK, so pay a "reasonable wage" of say $5,000 or something comparable to someone earning income for the same type of services-----personal secretary??? And the actual services rendered for the corporation can be paid in the form of a 1099 MISC. The IRS will collect their 15.3% or 14.12% after half of SE is deducted and all parties are happy I suppose. The only party left out of the equation is the state, which, could argue that a greater employee/employer relationship exists to prompt more of a wage to be paid---who knows what California would try to pull!

I don't have much experience in IRS audits, but I figure that the IRS could argue that a employee/employer relationship exists. If so, then any expenses claimed on the Schedule C that are not reimbursed by the corp are then subject to 2% of AGI. Then, the state will get involved and wonder why SUTA was not paid and in a timely manner.

Maybe its just easier to form a LLC and not worry about paying wages.

[OldJack]

Facts and circumstances, of course, must be reviewed in every case so not every 100% shareholder will qualify as an independent contractor.

It is true that a 2%+ shareholder can be paid as an independent contractor in some cases. However, it would not be true if the corporation was engaged in the same activities as the shareholder is providing services.

ie: A law firm corporation could not be paying as 1099 for a shareholder that is providing legal services for the law firm, but a shoe store corporation could pay by 1099 a lawyer shareholder for legal services provided the shoe store.

ie: A painting corporation could not pay 1099 to a shareholder that has provided personal painting for the painting corporation's customers, you see the shareholder is doing the job of an employee for the corporation.

[DaveinTexas]

Old Jack, You....

Old Jack, always abiding by the law. I appreciate and completely understand your commentary. I happen to think that you are right on the money when you say...

"It is true that a 2%+ shareholder can be paid as an independent contractor in some cases. However, it would not be true if the corporation was engaged in the same activities as the shareholder is providing services."

I wasn't trying to bend the law, just trying to oversimplify the complexity of owning your own corporation. I guess in the end, there are no shortcuts to doing things the right way. Sounds like a Mark Twain quote.

Thanks all for the responses.