Welcome back! Ask questions, get answers, and join our large community of tax professionals.
cancel
Showing results for 
Search instead for 
Did you mean: 

OFFICER COMPENSATION 1120

Level 5

Finished an 1120. Officer had $25,000 in "compensation of officers" line 12. Where on the 1040 would I report that, if reported there? This is a C corp. 

Labels (1)
0 Cheers
1 Solution

Accepted Solutions
Level 15

In your words she "compensated herself for her services".  In the world of tax, that means payroll.  The only way to properly report payroll is on a W-2.  Schedule C would indicate that she was an independent contractor.  Kind of hard to be an independent contractor when you own the business.

This week's special - free roadrunner dinner with every return (legal disclaimer - you catch it and we'll cook it)

View solution in original post

21 Replies 21
Level 13

@mvp2885 wrote:

Finished an 1120. Officer had $25,000 in "compensation of officers" line 12. 


If you finished the 1120, YOU need to know what that "compensation" is.  In most cases, that means they received wages and have a W-2.  Assuming that is the case, you enter the W-2 on the 1040.

Level 5

This person didn't have a w-2 😕 She should have, but didn't. She just "drew" or "compensated" herself for her services by just transferring the money from her business account to personal, and physical withdrawing money from her account. 

0 Cheers
Level 15

Sounds you just found some extra work to keep you busy.  Time to prepare a W-2 and 4 quarters of payroll tax returns.  Tell your client to wait for those late payment and maybe late filing penalties to come in.  Some people really should be schedule Cs instead of corporations.

This week's special - free roadrunner dinner with every return (legal disclaimer - you catch it and we'll cook it)
Level 5

Any work around besides going through the w-2 mess? Reporting those wages on Schedule C? They might be willing to pay the SE taxes. 

0 Cheers
Level 15

"Any work around besides going through the w-2 mess? Reporting those wages on Schedule C? They might be willing to pay the SE taxes."

Uh, no. Your client is not self-employed. Basically, your client stole funds from the Corporation, a separate entity. Whoever is managing the Corporation should have known there needs to be payroll.

Tell your client there is no shortcut or relief from this severe of an error, and there are going to be penalties and interest and employer share of taxes and employee share of taxes to submit. And find out how many years that has been done.

I like to use the name "Enron" but in a whisper:

"What caused the collapse of Enron?

Greed caused the downfall of both the corporation by developing a system where no one was actually looking out for the good of the company. The hunger fueled executives to make decisions in their own personal interest, at the sacrifice of the company, which led to the Enron collapse."
and:
"The Enron scandal, publicized in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the de facto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world."
*******************************
"Level Up" is a gaming function, not a real life function.
0 Cheers
Level 13

@mvp2885 wrote:

They might be willing to pay the SE taxes. 


LOL.  "might be willing"?  As if paying taxes is optional?

They started a corporation, they need to do it right.  Prepare the W-2s and payroll.  It is not a choice.  If they want you to prepare the forms, warn them about penalties and get paid upfront.

You may want to assess if a corporation is right for the client or not.  Based on what they are doing, as Jeff said, a Schedule C may be better.

 

Level 15

In your words she "compensated herself for her services".  In the world of tax, that means payroll.  The only way to properly report payroll is on a W-2.  Schedule C would indicate that she was an independent contractor.  Kind of hard to be an independent contractor when you own the business.

This week's special - free roadrunner dinner with every return (legal disclaimer - you catch it and we'll cook it)

View solution in original post

Level 5

Got it, I will have her go to her old accountant, too much hassle for me.

Level 15

"I will have her go to her old accountant, too much hassle for me"

Too much risk for you.

*******************************
"Level Up" is a gaming function, not a real life function.
Level 5

True! 

0 Cheers
Level 15

@mvp2885 wrote:

Got it, I will have her go to her old accountant, too much hassle for me.


Good choice 😁

This week's special - free roadrunner dinner with every return (legal disclaimer - you catch it and we'll cook it)
Level 2

You might consider treating the amount taken as a loan to stockholder rather than compensation. Then in a future year either just pay back loan and if more cash needed put yourself on larger payroll and use part of net to repay loan. 

Probably no effect on total taxes in either year. Main reason to fix on books for 2019 is to avoid legal liability issue of corporate veil having been pierced by using corporate funds for personal expenses.

0 Cheers
Level 13

@FREDW21901 wrote:

You might consider treating the amount taken as a loan to stockholder rather than compensation. Then in a future year either just pay back loan and if more cash needed put yourself on larger payroll and use part of net to repay loan. 

Probably no effect on total taxes in either year. Main reason to fix on books for 2019 is to avoid legal liability issue of corporate veil having been pierced by using corporate funds for personal expenses.


While that may be easier, it isn't correct.

The person is REQUIRED to take "reasonable compensation".  The OP specifically said it was for compensation, so the intent was for compensation, not a loan.  You can't 'invent' things just because it is easier.

Level 15

The only time this would be loan is when they "take" money casually, they post it as payroll expense, you catch them at it, you change that to Loaned to Shareholder, you run that Gross through payroll, and you withhold the net take home against the total they "borrowed." That's one way to Fix this at the end of the year = one payroll date. For instance, someone is on payroll and also using corporate funds personally or taking "draws" and this is my recommendation to their payroll clerk when we are reviewing the year end.

*******************************
"Level Up" is a gaming function, not a real life function.
Level 1

But what about a 1099-Div, that would work or no 

0 Cheers
Level 15

@Ts2006 

1099-Div is for issuing Dividends to shareholders. That isn't the issue here at all, so No, it doesn't work.

*******************************
"Level Up" is a gaming function, not a real life function.
0 Cheers

-

0 Cheers
Level 15

"Similar situation.  If  CPA recommends using a 1099 for owners compensation for a single person s-Corp, is the CPA liable for this mistake?"

Hopefully the CPA has his professional liability policy paid up to date.

 

If owners comp is listed on 1120 line 7 and then on schedule C, how is this classified?

The question can't be answered since that would not be an acceptable route to prepare either return.

This week's special - free roadrunner dinner with every return (legal disclaimer - you catch it and we'll cook it)

-

0 Cheers
Level 15

Wages mean W-2, not 1099.

For what it's worth, I wouldn't sign that return.

This week's special - free roadrunner dinner with every return (legal disclaimer - you catch it and we'll cook it)
Level 15

"If CPA recommends using a 1099 for owners compensation for a single person s-Corp, is the CPA liable for this mistake?"

There was a whole year to make it possible to catch this error before getting to the 1120-S, though.

"If owners comp is listed on 1120 line 7 and then on schedule C, how is this classified?"

Well, 1120 is a C Corp, not S Corp. Sched C is for someone who is Not employed by the corporation, but performing as their own business providing services to the corporation.

Someone needs to backup, redo everything, and make it right. Not try to figure out how to make it Worse.

*******************************
"Level Up" is a gaming function, not a real life function.