1120S -> SE Tax

[ILLMAS]

Ah you think you see them all, it seems the TP was so well advice that he is skipping on paying SE taxes. TP is a real estate agent, he setup a corporation (S-corp), he got paid and didn't draw a salary, profit is reported on the K-1, is there a way to calculate SE taxes, I believe if he gets audited, IRS is going to hit him for avoiding payroll taxes. On his personal income tax return he is only paying income tax from the profit on the K-1. Your thoughts?

[OldJack]

Shareholder receiving a 1120S-k1 is NOT self-employed and as such the income is not subject to SE tax. If the amount is not large the odds are the IRS will not cause any problem. That said the client should know he is required in most cases to take a salary.

[taxtrio]

"Rule of thumb" is that the Shareholder doing the work should be (must be) drawing a salary for an amount the reflects the amount of work he does (commensurate). Usually the IRS expects the salary to be at least 50% of the profit of the 1120S; or they can come back on him for employment taxes....

Taxtrio

[OldJack]

I don't recall any document that states or implies a 50% of profit as a rule of thumb amount for officer salary. In fact, salary is NOT even required if there are zero distributions or payments of any kind to the officer shareholder.

[michaelmars]

I don't recall any document that states or implies a 50% of profit as a rule of thumb amount for officer salary. In fact, salary is NOT even required if there are zero distributions or payments of any kind to the officer shareholder.

Would being a licensed individual make this a Personal Service Corp?

[ILLMAS]

Yes I forgot it should be treated a PSC and he has to pay 35% tax rate.

[TAXBILLY]

Yes I forgot it should be treated a PSC and he has to pay 35% tax rate.

An S-Corp is NOT a PSC, only C-Corps.

And anyway real estate agents are not one of the PSC professional categories.

taxbilly

[Randall]

Ah you think you see them all, it seems the TP was so well advice that he is skipping on paying SE taxes. TP is a real estate agent, he setup a corporation (S-corp), he got paid and didn't draw a salary, profit is reported on the K-1, is there a way to calculate SE taxes, I believe if he gets audited, IRS is going to hit him for avoiding payroll taxes. On his personal income tax return he is only paying income tax from the profit on the K-1. Your thoughts?

If you're talking about 2010, you can get him set up on payroll, pay a bonus for 2010, issue W-2, etc.