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Now that "what shoulda been done" has been covered, let's get back to "what to do now." The whole purpose of requiring S corps to pay owners for their work is to prevent evasion of Social Security taxes. If the amount on the 1099-NEC is reasonable and reported on a Schedule SE, IRS has nothing to complain about. They might not have found out about what they should have done in 2020, until 2021. At that point, someone made the decision to avoid penalties on late-filed 941's by using the 1099-NEC instead. Considering the IRS backlog of unprocessed 941's, that may have been doing the government a favor.
What they should do now -- what they should have started doing already -- is report wages on payroll tax returns. That includes state reporting requirements; they're also evading unemployment taxes. Meanwhile, get the 1040 filed. Unless you're in a disaster area, you're already late.
Speaking of RCReports, here is their take on the issue, which admits that sometimes an S Corp can 1099 an owner:
The example they give is real estate agents. But as I noted earlier, there might be a case where an OTR truckdriver can claim the special status. That's a big issue these days in the "employee vs. IC" debate in California, for example.
