OFFICER COMPENSATION 1120

[mvp2885]

Finished an 1120. Officer had $25,000 in "compensation of officers" line 12. Where on the 1040 would I report that, if reported there? This is a C corp. 

[TaxGuyBill]

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@mvp2885 wrote:

Finished an 1120. Officer had $25,000 in "compensation of officers" line 12. 

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If you finished the 1120, YOU need to know what that "compensation" is.  In most cases, that means they received wages and have a W-2.  Assuming that is the case, you enter the W-2 on the 1040.

[mvp2885]

This person didn't have a w-2 😕 She should have, but didn't. She just "drew" or "compensated" herself for her services by just transferring the money from her business account to personal, and physical withdrawing money from her account. 

[IRonMaN]

Sounds you just found some extra work to keep you busy.  Time to prepare a W-2 and 4 quarters of payroll tax returns.  Tell your client to wait for those late payment and maybe late filing penalties to come in.  Some people really should be schedule Cs instead of corporations.

[mvp2885]

Any work around besides going through the w-2 mess? Reporting those wages on Schedule C? They might be willing to pay the SE taxes. 

[qbteachmt]

"Any work around besides going through the w-2 mess? Reporting those wages on Schedule C? They might be willing to pay the SE taxes."

Uh, no. Your client is not self-employed. Basically, your client stole funds from the Corporation, a separate entity. Whoever is managing the Corporation should have known there needs to be payroll.

Tell your client there is no shortcut or relief from this severe of an error, and there are going to be penalties and interest and employer share of taxes and employee share of taxes to submit. And find out how many years that has been done.

I like to use the name "Enron" but in a whisper:

"What caused the collapse of Enron?

Greed caused the downfall of both the corporation by developing a system where no one was actually looking out for the good of the company. The hunger fueled executives to make decisions in their own personal interest, at the sacrifice of the company, which led to the Enron collapse."

and:

"The Enron scandal, publicized in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the de facto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world."

[TaxGuyBill]

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@mvp2885 wrote:

They might be willing to pay the SE taxes. 

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LOL.  "might be willing"?  As if paying taxes is optional?

They started a corporation, they need to do it right.  Prepare the W-2s and payroll.  It is not a choice.  If they want you to prepare the forms, warn them about penalties and get paid upfront.

You may want to assess if a corporation is right for the client or not.  Based on what they are doing, as Jeff said, a Schedule C may be better.

[IRonMaN · Accepted solution]

In your words she "compensated herself for her services".  In the world of tax, that means payroll.  The only way to properly report payroll is on a W-2.  Schedule C would indicate that she was an independent contractor.  Kind of hard to be an independent contractor when you own the business.

[mvp2885]

Got it, I will have her go to her old accountant, too much hassle for me.

[qbteachmt]

"I will have her go to her old accountant, too much hassle for me"

Too much risk for you.

[IRonMaN]

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@mvp2885 wrote:

Got it, I will have her go to her old accountant, too much hassle for me.

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Good choice 😁

[mvp2885]

True! 

[FREDW21901]

You might consider treating the amount taken as a loan to stockholder rather than compensation. Then in a future year either just pay back loan and if more cash needed put yourself on larger payroll and use part of net to repay loan. 

Probably no effect on total taxes in either year. Main reason to fix on books for 2019 is to avoid legal liability issue of corporate veil having been pierced by using corporate funds for personal expenses.

[TaxGuyBill]

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@FREDW21901 wrote:

You might consider treating the amount taken as a loan to stockholder rather than compensation. Then in a future year either just pay back loan and if more cash needed put yourself on larger payroll and use part of net to repay loan. 

Probably no effect on total taxes in either year. Main reason to fix on books for 2019 is to avoid legal liability issue of corporate veil having been pierced by using corporate funds for personal expenses.

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While that may be easier, it isn't correct.

The person is REQUIRED to take "reasonable compensation".  The OP specifically said it was for compensation, so the intent was for compensation, not a loan.  You can't 'invent' things just because it is easier.

[qbteachmt]

The only time this would be loan is when they "take" money casually, they post it as payroll expense, you catch them at it, you change that to Loaned to Shareholder, you run that Gross through payroll, and you withhold the net take home against the total they "borrowed." That's one way to Fix this at the end of the year = one payroll date. For instance, someone is on payroll and also using corporate funds personally or taking "draws" and this is my recommendation to their payroll clerk when we are reviewing the year end.

[Ts2006]

But what about a 1099-Div, that would work or no 

[qbteachmt]

@Ts2006 

1099-Div is for issuing Dividends to shareholders. That isn't the issue here at all, so No, it doesn't work.

[Anonymous]

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[IRonMaN]

"Similar situation.  If  CPA recommends using a 1099 for owners compensation for a single person s-Corp, is the CPA liable for this mistake?"

Hopefully the CPA has his professional liability policy paid up to date.

If owners comp is listed on 1120 line 7 and then on schedule C, how is this classified?

The question can't be answered since that would not be an acceptable route to prepare either return.

[Anonymous]

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[IRonMaN]

Wages mean W-2, not 1099.

For what it's worth, I wouldn't sign that return.

[qbteachmt]

"If CPA recommends using a 1099 for owners compensation for a single person s-Corp, is the CPA liable for this mistake?"

There was a whole year to make it possible to catch this error before getting to the 1120-S, though.

"If owners comp is listed on 1120 line 7 and then on schedule C, how is this classified?"

Well, 1120 is a C Corp, not S Corp. Sched C is for someone who is Not employed by the corporation, but performing as their own business providing services to the corporation.

Someone needs to backup, redo everything, and make it right. Not try to figure out how to make it Worse.

[Nuimage]

1099s are banker forms.  federal reserve accounts which you put if you are a banker in official 1096 area your private bond number.  If you sign for your checks its coming out of your constructive trust which is different.  everything is butficated and why it is always about the double booking entry system.  its all about DEBT and CREDIT/Private  PUBLIC

If you know who you are then you pay yourself with the right form or make your form up