Salary or st

[Strongsilence-CPA]

New in 2024 shareholder called Mr. X. S corp.

These payments to Mr. X sound like guaranteed payments.  But S Corps don't have GP.  

What is the tax treatment of these payments?

Excerpt from stock purchase agreement between X and Y:  Transfer of Projects. At the time of share transfer, Mr. X will transfer the following three projects to Company Y, deleted. In addition to Mr. X’s normal compensation, Company Y will pay Mr. X 10% of project receipts from these three projects until the amount of these special payments reaches $37,500. These special payments will be made approximately semi-annually or on a different schedule as agreed by the shareholders.

[dkh]

My opinion is to treat them as wages based on this part of the excerpt.........

---

. In addition to Mr. X’s normal compensation, 

[IRonMaN]

I got a little confused with the "stock purchase agreement" and who is X and who is Y. I think I agree with wages as long as I understood the whole thing correctly.

As a side note, next time stick to using Sven and Ole to make things easier to follow.

[qbteachmt]

"will pay Mr. X 10% of project receipts"

Seems like commission to me, which is ordinary compensation. Happens to be limited, as a Not To Exceed clause.

[BobKamman]

The agreement says Company Y is paying Mr X, not his company.  Has he assigned that income to Company X?  He's not a shareholder of Y, is he?  

A lot of compensation to S Corps for work their owners do, is turned into distributions not subject to employment taxes.  He can probably get away with it here, as long as he is getting reasonable compensation from payroll.   

[qbteachmt]

"He's not a shareholder of Y, is he?"

It seems so, reading it:

Mr X is now a shareholder of an S Corp "Company Y." In addition, he is bringing with him 3 projects. He will get a specific amount from Company Y for these prior existing projects, in addition to his regular compensation.

[BobKamman]

"Excerpt from stock purchase agreement between X and Y:"

So did Mr X own Company X, which then sold its shares to Company Y?  Or did Company X transfer some of its assets to Mr Y?  Nothing is apparent here.  

[sjrcpa]

These payments could be part of the stock sales price, too.

[Strongsilence-CPA]

These payments could be part of the stock sales price, too

Good point. I think a reduction of the purchase price would have been a better benefit than compensation.

For me, it raises the point about conflict of interest.  At the time of the sale, I did the tax return for the corporation, the departing shareholder, the other two shareholders. But I didn't do the return for the income shareholder.