Schedule C filer paying himself on a W-2

[joe7230]

A sole proprietor pays himself on a W-2.  He is not an S corp.  How can I deduct his salary on the schedule C. 

[Terry53029]

You don't have salary as sole proprietor, so you can't deduct it. Did he also file 940- 941's 

[BobKamman]

I think this question comes up here every year or so.  It's not right, but it's a solution for some small business owners who have trouble keeping up with quarterly payments.  Three weeks away from an extended due date, I would deduct it as wages and tell him not to do it again.  Either take a monthly draw at the same time he makes a monthly ES payment; or set up an LLC taxed as an S corporation.  

[joe7230]

What line on the 

What line on the schedule C would you enter the sole proprietor's wages?  Line 37 specifically states "do not include owners wages"  Line 11 states contract labor.  Where do you recommend I enter the amount?

[abctax55]

Under 'owner draw'.... which is NOT on Sch C.

The payroll reporting needs to be amended/corrected as a Sch C owner is not to be paid via W-2.

edit....

Or live dangerously/run with those scissors and follow Bob's advice.  

[IRonMaN]

September 26th?  I would seriously consider taking those scissors and run.  Put the amount on the "wages" line on schedule C and after October 15th start amending the 2024 payroll tax returns to do things correctly for the 2024 tax return.

[abctax55]

Any retirement plan contributions involved?

[BobKamman]

Line 37.  If they try to send him to Leavenworth I'll show up as a character witness.  

One caveat:  Does this result in a Schedule C loss?  That makes it look as if he is trying to buy Social Security credits.  I would adjust the deduction so it's break-even, in that case.  

[qbteachmt]

There is no wage deduction as an Expense. It doesn't reduce the Schedule C business income. It reduces the bank. He took his own money, in other words.

Using this as a strategy for paying in as withholding instead of estimated income tax is not the best way to be forced to make your payments. You also have the issue of the employer's share of payroll taxes paid, since that "employer" isn't entitled to payroll tax deduction as expense on the amounts.

[BobKamman]

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@qbteachmt wrote:

You also have the issue of the employer's share of payroll taxes paid, since that "employer" isn't entitled to payroll tax deduction as expense on the amounts.

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That's why the Schedule C filer can deduct half the SE tax.  Six of one, half a dozen of the other.  

[qbteachmt]

Schedule SE has an adjusted rate for tax. Sched C has a business expense deduction.

Not six of one, half a dozen of the other.

[sjrcpa]

Pretty darn close, especially this close to a filing deadline.

[BobKamman]

@qbteachmt What is the adjusted rate for tax on Schedule C?  I thought if you paid the employer share of 7.65% you could deduct 7.65%.  

[qbteachmt]

"What is the adjusted rate for tax on Schedule C?"

Bob, I can't decide if you really don't know this, or just want me to prove that I know it. I will show it to @joe7230 just because Bob still wrote it incorrectly.

It's on the Sched SE, as I noted. Not Sched C; there is no tax like this on the Sched C. That's similar to how the health insurance deduction for employees would be on the Sched C but not for the sole proprietor. The Sole Proprietor has these items on their Form 1040.

If you are filing Sched C and you have employees, their employer share of employment taxes (social security, medicare, unemployment) is on Sched C. The Schedule SE has the computation, the adjustment, and the deduction (which goes to the Form 1040) for the nonwage owner.

I often address this to people who complain about being 1099-NEC "and now I have to pay both parts of the taxes." The "employer" entity gets a consideration for it, as parity to employer's match to employee share. It's the 92.35% you see on the Sched SE. You follow the math to the point that you compute the Social Security and Medicare on a reduced amount of business income than is on the Sched C. Then, the 50% deduction goes to Schedule 1, part of Form 1040 and not part of Schedule C (business).

You can't use the amounts a sole proprietor "paid" themselves for taxes owed, because that isn't taxable directly (draws are not an expense and are not a taxable event). It's money taken from the business taxable income, which requires an SE tax and also deserves a credit, and that credit makes a reduction in business income (but not as a Sched C line item deduction), which reduces the tax, which reduces the amount on which the adjustment is based, which reduces the credit.

If you were to do this manually, you see the formula is recursive. That's why it is adjusted. 

For employees, you get the tax deduction in full as a business deduction.

[Terry53029]

Seems like everyone is getting off topic. As stated earlier you cannot deduct owner's salary on schedule C if you want to follow IRS  instructions. If you don't want to follow their instructions that is up to you.

[BobKamman]

@qbteachmt In other words, there is no "adjusted rate for tax on the Schedule C"

Let’s say a Schedule C filer has a net profit of $107,650. But he (incorrectly) paid himself a $100,000 salary. He deducted that, and then deducted the $7,650 FICA tax that he also paid.

Bottom line on Schedule C: Zero. Therefore, income tax effect and SE tax effect on Form 1040: zero. (Also, no QBI deduction.)

Had it been done correctly, his Schedule C profit of $107,650 would show up on Schedule SE, but his SE income would be reduced to $99,415. His SE tax is $15,310. But he didn’t have to pay that $7,650. So the difference is $7,660 and it costs him only $10 more.

If he does this for the next 20 years, it might make enough difference in his Social Security earnings record (which will show $99,415 annual earnings, not $100,000) to make $1 a month difference in benefits.

But he has shot himself in the foot, if he missed out on the QBI deduction.

Put yourself in the place of an IRS auditor.  Do you:

a)  Make a referral to CID?

or

b)  Move on to the next issue.

[qbteachmt]

Bob, no offense, but your horse is dead, beat, buried, bones, and now the fossil fuel.

[IRonMaN]

The horse might be dead and buried, but the more important point is the fact that Joe road off into the sunset with that horse last Thursday.