1120S SH with too few wages

[imjulier]

Hi-

Just looking for ideas. I have an S-corp SH who claimed wages of $48,000 in 2012 but profit in company is $90K after taking the wages, travel, other allowable expenses, etc. I was thinking about recommending issuing him a 1099 so that employment taxes would be paid with Schedule C in personal retrun. I know he is not paying himself the "fair wage" and he did not indicate to me throughout the year that he was making a ton of money and we should consider changing his payroll. Is the 1099-Misc a good idea, bad idea, other ideas? What do you do with taxpayers who do this?

Thanks,

Julie

[kcjenkins]

I need more info. Clearly, just because he made more than he paid himself does not mean he did anything wrong. Ask him about the reason he is leaving that much in the business. Perhaps he is planning an expansion, or an investment in equipment, etc. There is no way I'd issue a 1099 in this situation unless it had gone on a lot longer than 1 year.

[OldJack]

What is a "fair wage"?? What is Obama's fair tax?? What's wrong with $48,000?? Did he take additional "distributions"?? If no distributions other than salary the IRS has no authority to do any reclassification of his wage. His S-corp could have a million dollar profit and his wage of $48,000 could be fair depending upon his time, effort, and participation in making the million. There is no justification for issuing a 1099 as there were no 1099 payments.

[grandmabee]

agree depends on distributions. now if he took out the profit in distributions I would have a serious talk about wages. I don't think even then I would issue a 1099.

[kcjenkins]

Also depends on how the profit is earned. If it is all from his efforts, such as a consultant selling his services with very little expense, then there is a basis for saying the salary is too low. But if there is significant value from other areas, such as high-value equipment, then a significant part of the income is reasonably ROI on that equipment, and properly taken as dividends not subject to SE tax.

[imjulier]

Sorry-

Forgot to include the distributions. $104K which is the 90K in income plus most of the $15K he left in the bank last year. No equipment. He is a consultant with lots of travel expenses, mileage, M&E, phone, etc... Also, he has pushed the low side of wages for a few years but not this bad. As an example, 2011 was $40K of wages with a remaining $61K in profit after expenses, wages, etc. And in 2011 he left something in the business. Future plans are unclear as he now has a W-2 job and a baby on the way. But he wants to keep his consulting business on the side and earn $150K gross and $100K net which is his prediction for 2013.

Thanks for the thoughts. Interesting thought on the equipment KC.

Julie

[kcjenkins]

OK, with that additional info I can see where you are coming from. I agree that the IRS would certainly consider the salary being less than a third of the total he took out to be unreasonably low. On the other hand, there have been lots of examples where the taxpayers got away with it. John Edwards being the classic example.

http://blogs.findlaw.com/eighth_circuit/2012/02/reasonable-compensation-john-edwards-tax-shelter-strikes-again.html

Just so you don't think I am being "partisan"

http://taxprof.typepad.com/taxprof_blog/2012/01/newt-gingrich-used-.html

Finally:

http://taxprof.typepad.com/taxprof_blog/2011/06/more-on-the-.html