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Old 02-21-2017, 02:39 PM
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How to "zero out" personal 1099-MISC that is really S-corp gross receipts?

My wife started an S-corp in 2015 and worked as a contractor. The company she contracted for reported her payments to the IRS under her SSN (1099-MISC) rather than her S-corp EIN (not sure if this is standard practice or an error on their part). We didn't realize that was important at the time since she had a CPA handling her S-corp taxes and didn't report that $ on our personal income taxes. Just received a nasty-gram from the IRS wanting taxes, underpayment penalty, and interest on the unreported "non-employee compensation". The amount reported is identical to the gross receipts filed on her 1120S so I'm pretty sure everything is okay except that we need to somehow show that the 1099-MISC $ was actually passed directly to the S-corp and appropriate taxes paid there. Any advice on what we need to do? I assume it's not as simple as sending a copy of the 1120S and letter explaining the discrepancy. They'll want forms and an amended 1040 from us?

Seems we'll have the same issue this year and her CPA made a comment about making sure we report the 1099-MISC on our personal taxes and "zero it out" so that we aren't taxed twice. Too late for 2015 - gotta fix it.

Also - 100% of the amount on the 1099-MISC went straight to the S-corp. She is the only shareholder and employee and received wages from the S-corp. The appropriate W2 and schedule K-1 were filed with our personal taxes.


Last edited by JoBu : 02-21-2017 at 02:52 PM.


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Old 02-22-2017, 12:58 AM
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My wife started an S-corp in 2015 and worked as a contractor. The company she contracted for reported her payments to the IRS under her SSN (1099-MISC) rather than her S-corp EIN (not sure if this is standard practice or an error on their part).=====> IRS mandates that payors issue 1099s to independent contractors, but there are exceptions for reg C corps ? or S corps ; the major exception to the 1099 requirement is payments to corps. Most payments to incorporated businesses do not require that a payor issues a 1099 form. This exception also applies to LLCs that elect to be treated as corps. There are a few cases in which you do have to issue 1099s to corporations, including payments for legal services, payments for medical or health care services, and cash purchases of fish or other seafood for resale. Also if you pay a law firm money in connection with legal services, as part of a settlement for example, the amount must be reported as gross proceeds on the 1099.However, your spouse?s biz entity is an S corp not a sole proprietorship, she NEEDS to file form 1120S rather than a Sch C of 1040;I mean the payor, the company did not need to send a 1099 to her S corp due to the reason as explained above.

We didn't realize that was important at the time since she had a CPA handling her S-corp taxes and didn't report that $ on our personal income taxes. Just received a nasty-gram from the IRS wanting taxes, underpayment penalty, and interest on the unreported "non-employee compensation". The amount reported is identical to the gross receipts filed on her 1120S so I'm pretty sure everything is okay except that we need to somehow show that the 1099-MISC $ was actually passed directly to the S-corp and appropriate taxes paid there. Any advice on what we need to do? ======So,your spouse has a Sub S corp, but NOW she noticed that last year, the contract employer sent her a 1099 with box 7 checked using her SSN#, not her biz EIN. I mean the 1099 incorrectly listed your spouse?s SSN# and this income should be reported as earned by her S corp. If that is the case, then I recommend you contact the issuer of the 1099 and ask for a corrected 1099. You need to convince the payer to $0 out the 1099-Misc form. I mena th epayor needs to issue a corrected 1099, either type #1 or tyoe #2 mistake and sub it the corrected 1099 to the IRS and your spouse.Here's the reason. 12-18 months from now, the IRS computer is going to wake up and try to match all reported income to your tax return. If it sees 1099-Misc/box 7 income under her SSN, it's going to look to the receipts line of a sch C to see if you reported the income. It won't find the income there. It will *not* cross check to the S-corp to see if the income was reported there, so it will issue a CP2000 trying to add the income in a second time....and claiming your spouse owe 30%-40% for additional income and self-employment income taxes.
You will go through HELL trying to get someone at the IRS to look at your records, agree that you did report the income and mark the flagged return as correct; so if the 1099 is reporting with your SSN# rather than her EIN number, she needs to contact the payor and has it changed. I don't think you are going to have to report the money as I think you paid it not received it.


I assume it's not as simple as sending a copy of the 1120S and letter explaining the discrepancy. They'll want forms and an amended 1040 from us?====>Now you are asking if you can just "assign" the income to the S corp, the answer is no. The assignment of income doctrine is very clear in that it looks at the substance of the transaction and not just the form.The IRS and the Courts look at who earned the income and just because there is a claim to assign this to someone else, does not shift the burden of the tax implications.Your facts are somewhat limited, but unless you have documentation of a legitimate assignment of income (before any services were rendered) and the S corp actually "earned" the income, it is doubtful that you can accomplish any assignment on income in your case.


Seems we'll have the same issue this year and her CPA made a comment about making sure we report the 1099-MISC on our personal taxes and "zero it out" so that we aren't taxed twice. Too late for 2015 - gotta fix it.====> this means that unless they send you a corrected 1099 and submit the corrected 1099 to IRS, then you must report the amount n 1099MISC on Sch C of1040 and zero it out by reporting the same amount on sch C of 1040 as other expenses with explanation on Sch C of 1040 and report the income on her 1120S as regular S corp income .however the best solution is to have the payor correct and send a corrected 1099 to her . In my opinion, there is no reason for the payor not to correct the 1099 and send your spouse the corrected 1099.

Also - 100% of the amount on the 1099-MISC went straight to the S-corp. She is the only shareholder and employee and received wages from the S-corp. The appropriate W2 and schedule K-1 were filed with our personal taxes.====>>as mentioned above.



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