SE tax is for self-employed people. Your client is not self-employed. You are trying to pound a square K-1 into a round Schedule SE hole. It might make you feel better, to see the client pay some of the taxes that you have to pay, but it's wrong. It also might trigger credits, like EIC, that the client doesn't deserve. And IRS will wonder why you helped with that.
The leading Tax Court case on this issue seems to be from 2001, Veterinary Surgical Consultants, PC. Note that it's the corporation that was examined and assessed, not the shareholder. He paid tax on all the income (apparently he had maxed out on FICA already). The officer as employee had clean hands, but he was up to his elbows, as veterinarians sometimes must do, as the only shareholder.
Likewise, if you are being hired to prepare an income tax return, the result will be the same (generally, as they say) whether the income is on a K-1 or a W-2. It's the preparer of the corporation return who might be in trouble, and the rest of his corporate clients should be concerned about an IRS project. But that doesn't mean you have to work for someone whose attitude about taxes is different from yours.
If you really felt strongly about this last year, you would have told him "don't come back without a W-2 showing reasonable compensation." Instead, you shared your opinion about what his other preparer was doing. Seems to me, it's time to file the extension and ask him not to slam the door as he walks out with it.
