Discussion:100% owner of C-corp, receives 1099 for consulting.

As a C corp he needs to establish payroll. Michaelstar and your client are right. He is an employee of the corporation.

I am confused by your term as self-employee. Are all the employees of the corporation recieving 1099s at year end?

Not sure how a sole shareholder doing work for the C Corp could be classified as anything OTHER than an employee.

IRS SB/SE Memorandum (SB/SE 04-0307-012) on Officer Compensation and Code Sec. 3509

Per Death&Tax's advice, yes, I found the memorandum SB/SE 04-0307-012. On this memorandum, the second to last paragraph, says "Pub. L. No. 95-600 provides relief from employment taxes when a taxpayer does not treat an individual as an employee, tax returns demonstrate the taxpayer treated the individual as a nonemployee, the taxpayer had a reasonable basis for not treating the individual as an employee, and the taxpayer did not treat any individual in a substantially similar position as an employee." What you guys comment about this? I thought my taxpayaer fall into this category, perhaps not.

...word of advice...be proactive when presenting this change to client, because it will cost him money...possibly you could revisit reasonable Comp from the S corp (and not max out SS there)...does the client have exposure for treating other workers of the C corp as contractors...bring him an idea or help him understand and solve a problem...good luck

Even 20 years ago - he needed to be treated as an employee and this compensation needed to be reported as W-2 wages.

Snp may wish to look into setting up a common paymaster arrangement so that his client gets paid from only one of the corps rather than two. This will allow him to avoid paying double SS tax at the ER level and will thus save some dollars.

Just sounds to me like JD was a little frustrated with the CPA pounding - nobody should be riding their high horse on this sort of thing. We all have to deal with the few that just do not get it - CPA, EA or whomever. Besides - if it was not for those few who do sloppy work - I as well as the rest of you would not be having people knock on our doors because some new client needs help fixing someones elses screw up.

Bottom line - the original one who posted this topic has to go back and tell his new client - that he (the client) is correct - the compensation needs to be reported as W-2 wages.

I just get frustrated with what I see as bashing so my comments were and are to the bashing - not to anyone individual. I believe we all should take the high road on the bashing this or that credential because in the end - it does not add to the question that was posted and certainly does not provide any educational value. I hear the CPA this and the EA that and I just say to myself - those letters do not mean squat! It is the person behind those letters and their dedication to the business that counts most.

So off my soap box and back to work.

Kevin - I just bought a bottle of Bookers for my buddy that comes over all the time and loves the stuff. There is always a bottle in the cabinet with his name on it. I like my Rum once in a while but I much more prefer a cold Heineken.

Here's to W-2's.......

A bottle of Macallan Highland Single Malt Scotch Whisky - 12 years old.

From a CPA who I helped research a tax issue.

JR? Shall I drink your dram since you don't like it? I LOVE this stuff!

I'm already on Sandy's glass.

The Macallan was one of the first Highland distilleries to take out a licence in 1824, since when it has been distilled by generations of craftsman on a small estate over looking the River near Craigellachie.

The key to understanding The Macallan lies in the Company's total dedication to quality and attention to detail. A purposefully tradtionalist distillery, no shor cuts are taken in time, investment and production of "the best glass" (Kingles Amis). Alongside its unusally small handbeaten copper stills, The Macallan is perhaps best known for its insistence on sherry aging.

The Macallan malt whisky is matured excluvisely in sherry oak casks from the bodegas of Jerez, Spain. The Spanish oak casks are hand-picked annually then seasoned for three years with the finest Oloroso and fino sherries. Shipped unbroken to Speyside they are filled with ne Macallan spirit and "sleep" for a mandatory 10 years while the cask inparts The Macallan's distinctive mellow flavor and rich golden color.

7. Special Rules for Paying Taxes Common Paymaster If two or more related corporations employ the same individual at the same time and pay this individual through a common paymaster, which is one of the corporations, the corporations are considered to be a single employer. They have to pay, in total, no more in social security and Medicare taxes than a single employer would.

Each corporation must pay its own part of the employment taxes and may deduct only its own part of the wages. The deductions will not be allowed unless the corporation reimburses the common paymaster for the wage and tax payments. See Regulations section 31.3121(s)-1 for more information.

Auditor was wrong. Officers are not always employees.

"(b) Corporate officers. Generally, an officer of a corporation is an employee of the corporation. However, an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration is considered not to be an employee of the corporation. A director of a corporation in his capacity as such is not an employee of the corporation" Treas. Reg. 31.3121(d)-1(b)

Also see: www.irs.gov/pub/irs-utl/emporind.pdf

"an officer is not considered to be an employee of the corporation if two requirements are met: (1) the officer does not perform any services or performs only minor services; and (2) the officer is not entitled to receive, directly or indirectly, any remuneration. Treas. Reg. section 31.3121(d)-1(b)."

"Officers are generally employees under the IRC. However, as explained in Lesson 3, an officer of a corporation who does not perform any services or performs only minor services and who neither receives nor is entitled to receive directly or indirectly any remuneration is considered not to be an employee. A director, as such, is not an employee. In these two circumstances, the individuals are independent contractors, and section 530 relief would be not applicable . Treas. Reg. section 31.3121(d)-1(b) (FICA); Treas. Reg. section 31.3306(i)-1(e) (FUTA); Treas. Reg. section 31.3401(c)-1(f) (federal income tax withholding)."

"A director of a corporation, acting in the capacity of a director, is not an employee of the corporation for those services, even if that worker also serves as an employee or officer of the corporation for other services. Therefore, part of the compensation paid this worker can be for services rendered as an independent contractor (director) and part of the payments can be for services rendered as an employee. Rev. Rul. 58-505."

See, e.g., Rev. Rul. 82-83, 1982-1 C.B. 151 ("It is a question of fact in all cases whether officers of a corporation are performing services within the scope of their duties as officers . . . ."); Rev. Rul. 58-505, 1958-2 C.B. 728 (corporate officers who also sold insurance policies under company's standard agents' contracts were not employees of corporation because "the services in the two capacities are separate and distinct").

Also see IRS CCA 200206053 (IRS CCA 2001)

"Question 34: An adult education teacher is a school district employee. In addition to her teaching job, she performs services of editing and layout for a school district newsletter. Is the compensation for the editing and layout work properly reported on her Form W-2 as wages for employment, or is she an independent contractor?

"The Service recognizes that an individual can work for one entity in a dual capacity. In Rev. Rul. 58-505, 1958-2 C.B., 728, the officers of an insurance company performed administrative duties for the company and also sold insurance policies under a standard independent contractor agreement. The Service held that they worked in two distinct capacities, employee and independent contractor. The ruling states that, if the two services are "interrelated," the officers do not act in two separate capacities. If, however, the services in the two capacities are separate and distinct, then the status of each type of service must be considered separately. This means that there is no interrelation either as to duties or remuneration in the two capacities. In this case, the two types of work are sufficiently different that it is possible, thought not certain, that the employee is working in two capacities."

For an example of when the dual capacity argument doesn't work see PLR 9808001 ("in this case, the physician faculty members' clinical and other non-teaching professional work is not different and distinct from their teaching work. Rather, the facets of their work are interrelated, both as to duties and as to remuneration. Thus, under the analysis of Rev. Rul. 58-505, the faculty members in this case do not hold dual status.")

The tax court said in the earlier case: "We understand petitioner in its amended opening brief to expand that list of cases and revenue ruling to include Idaho Ambucare Ctr. Inc. v. United States, 57 F.3d 752 (9th Cir.1995), United States v. Bernstein, 179 F.2d 105 (4th Cir.1949), United States v. Aberdeen Aerie No. 24, 148 F.2d 655 (9th Cir.1945), Ridge Country Club v. United States, 135 F.2d 718 (7th Cir.1943), and Rev. Rul. 58-505, 1958-2 C.B. 728. The principle that petitioner educes from these six cases and two revenue rulings is that an individual such as Ms. Odell may perform services for a taxpayer both as an employee and as an independent contractor. Petitioner concludes from this principle that petitioner is entitled to pay to Ms. Odell both wages and other amounts such as rent and royalties. Although we have no qualm with the principle educed by petitioner or its conclusion as to that principle, we do not believe that the cited cases or revenue rulings support a finding that petitioner reasonably believed that it paid the disputed amounts to Ms. Odell in other than her capacity as an employee."

Where this principle would apply is certainly not a typical fact pattern, but the principle has good authority, was taught in IRS classes, has been recently cited, and has the added benefit of making perfectly good sense.

Shareholders who perform services for a corporation are treated as employees, and are paid wages subject to S/E tax and other witholding. Corporte officers are specifically identified as employees under IRC Sections 3401(c) and 3121(d)(1). Since wages are deductible by a corporation, the incentive exists to pay the highest wages to avoid double taxation tht occurs with dividend distributions. This is in contrast to S corporaton where the incentive exists to take as low a wage as possible to avoid emp. tax. Ex-IRS Agent/Appeals Officer

Employee benefits are better in the C Corp.