"So what is the CPA’s responsibility here if he recommended 1099 for owners comp or just Corp check to owner."
There is no Owner; there is an Employee-Shareholder for purposes of an S Corp, for a person that owns the Shares and also works for the business. That CPA should fix everything for free, and paying any penalties and interest would be nice, and amending everything would be nice, to avoid the risk they will be called out for errors and omissions. Fortunately, the IRS likely will not see this as Fraud but as Incompetence on the part of the CPA. The customer might not see it that same way.
"still trying to understand how the funds on line 7 of 1120s owners comp would be classified if there was no w2."
"if there was no w2" would be a mistake. The regulation is Reasonable Compensation for services performed = what it would cost to hire someone to do the same work as a "regular" employee.
"Is it considered business income ? SE tax was applied to the full amount"
The business would pay an Independent Contractor and other Businesses as Expense. The person who is running their own business (as Corporation, partnership or Sole Proprietorship) does their own tax returns per the same regulations.
SE is the Employer's share of FICA + the Employee's share of FICA, so at a minimum, it would seem payroll taxes are mostly paid for this person's error.
Remember that Sched C Sched SE is a reduced value, because it is a circular reference that takes into consideration the "employer" share is reportable as Expense for the Sole Proprietorship's business. That is why, instead of a total 15.3% (a typical amount for FICA in aggregate), the Sched SE process results in approximately 14% paid in.
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