I've been considering a 50/50 LLC taxed as an S-Corp for my wife and me. She receives 1099 income and would take reasonable compensation as an active member.========>No 1099 for her as one of the shareholders of the S corp. Reporting S Corp officers' comp on a 1099 is rarely acceptableCorporate officers are statutory employees. Independent contractor treatment isn't appropriate. As an employee of the corp, she is generally paid wages or salary for services rendered to the corp. To the extent that an S Corp has net profits, those profits flow through to the shareholders in proportion to their ownership, and that information is reported on a Form K-1 of 1120S and on 1040 NOT on Sch C of 1040 so 1099 for her an S corp shareholder/officer.
I would not participate in the business activity, which is tied to her labor. Do I have to take a salary, =====>No not necessarily; Shareholders can be uninvolved investors, but S corps often have shareholders who are also officers of the company. When shareholders act as officers, they must receive compensation for their services as employees of the corp in the same way they would receive compensation if they were not shareholders. However, officers who do not perform any services or perform only minor services are not necessarily entitled to compensation or considered employees of the S corp.
or can we split the remaining profit as a dividend? ==============>yes; Shareholder distributions are treated differently than wages because they are deemed to be a return on the investor/employee?s investment in the S corp and not compensation for services rendered.Distributions to a shareholder must be included in the shareholders 1040s; however, the distributions are not subject to FICA tax and are not considered self-employment income subject to self-employment tax.