[PackerBacker12]

I was working on an S-Corp (single shareholder) and that shareholder’s Individual tax return today and I was looking at prior year’s return for the Individual and noticed the shareholder of the S-Corp was given a 1099 rather than a W2 from the S-Corp to meet reasonable compensation. I asked my boss why that was done and she said it’s basically a shortcut from getting a W2 because at the end of the day, self-employment taxes are paid. However, I always thought that members of a corporation are considered employees and should receive a W2 rather than a 1099. Furthermore, looking online I see forums where this is discussed and everybody mentions that the issuance of a 1099 is not correct. I’m just wondering if anybody has experience with such a situation and if what my boss did was correct. I think her issuing a 1099 rather than a W2 was not correct but I’m not sure.

[eMeRGeD]

Corporate officers are considered employees and have to be given a W-2. You'd have to make a strong case that the shareholder is not providing more than “minor services” to pass off giving them a 1099!

[Recked]

Technically NOT correct, but the tax effect is the same.
The IRS says officers are required to be on payroll, but in the real world it doesn't always work that way.
You can issue a 1099 to trigger the SE tax, or you can take the K-1 and make the box 1 amount subject to SE tax on the personal return.
As long as they are getting the SS and Medicare tax paid, even if its not 100% correct, your exposure is limited as the taxes are being paid.
If you are issue'ing a 1099 for less than the full profit (excluding deminimis amounts) or are not making any of the K-1 subject to SE, then you are cheating the SE tax rules and there is exposure.
Some people pay no W2 wages/officers comp, and do not issue a 1099 or make any of the K-1 subject to SE tax, and completely get away with it.
I would not recommend it, because if they are caught and you prepared the tax return incorrectly, you can potentially be sued for the penalty and interest.
We encourage all S corp officer's to be on W2 payroll and collect a fair and reasonable salary based on their time spent working, and a fair hourly wage.
If there was no W2 prepared, or payroll taxes paid by the due date for the 4th quarter payroll, then the late filing and payment on the payroll taxes for the 4th qtr, and potentially the test of the quarters make it very costly to go back and issue a W2.

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