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Old 10-10-2017, 07:33 PM
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Additional Income for LLC w/S-Corp Election

First of all, thank you for this forum and taking the time to respond to these posts. I reviewed the past posts and did not readily see this situation so my question is as follows:

I have an LLC w/ an S-Corp tax classification in which I am the only employee/shareholder and have been in operation for several years. My spouse has recently started doing some contract work and has submitted a W9 under her name (line 1) but using my LLC as the business name/EIN with the same tax classification as described above.

Since this will be short-term work through the end of the year, do I HAVE to set her up as an employee or can her "payment" simply be through a distribution to us from the LLC given that we file a married filing jointly tax return? We are not concerned about benefits regarding social security, retirement contributions, etc and my current salary as paid by the LLC would still be considered reasonable with the additional income.

Thanks for your time.



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Old 10-11-2017, 12:16 AM
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Quote:
Originally Posted by BC6950584 View Post
I have an LLC w/ an S-Corp tax classification in which I am the only employee/shareholder and have been in operation for several years. My spouse has recently started doing some contract work and has submitted a W9 under her name (line 1) but using my LLC as the business name/EIN with the same tax classification as described above.

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Don't confuse an independent contractor with a neighbor using a hammer and nails. An independent contractor is a professional working independently under an agreed-upon pricing or contract arrangement. The IRS has strict guidelines for independent contractors. A common area of mistake or confusion is the practice of an S-Corp issuing its own employees or shareholders 1099s. An S-Corp may not issue a 1099 in place of a reasonable salary to an employee. For instance, if there is a single employee in an S-Corp, they must be paid a reasonable salary (at least quarterly), the S-Corp must pay payroll taxes on those Social Security and Medicare benefits and file the appropriate forms (including but not limited to 941s and W-2s). Failure to pay an employee properly can put the S-Corp at risk for an audit and possible penalties by the IRS.By definition as your spouse provides services to the S-corp, you MUST issue him a W-2, NOT 1099.You might need to pay her/yoirself on a W-2, if your corp is doing well making money . but sicne your business is taxed as an S corp , you will not issue 1099 as spouses of S corp owners are considered 2% owners of the business. even if the corp is owned entirely by you.An S-Corp shareholder does not get a 1099. These folks get a Sch K-1, showing their portion of the income and expenses from the corporation.
however, in genral, S corp owners often wonder about putting their spouse on the payroll I mena on W2 as an employee. At one level, this seems to make sense because the wages paid to a spouse will create a tax deduction on the business income tax return. As a general rule, however, you don't actually want to do this. the money you pay a spouse will be a deduction on your 1120S But the money you pay will also be taxable on the spouse's tax returns. So there's often not any "net" income tax savings.What's more, adding a spouse to the payroll may increase the payroll taxes the S corp and the family members pay. The S corp and the employee will typically pay at least a 15.3% payroll tax on the wages for Social Security and Medicare taxes. And probably other hidden payroll taxes will get levied, too. The 6% Federal Unemployment Tax (aka FUTA), which applies to the first $7K of most employee's wages, may have to be paid. In most states, unemployment insurance may need to be paid, too.If you start thinking about these payroll taxes, you pretty quickly come to the idea that the S corp could simply increase the size of its distribution to the shareholder... and then the shareholder could give the money to his or her spouse. In this situation, bingo--no payroll taxes get paid on the amounts given to the spouse.For the preceding reasons, then, you probably don't want to put your spouse on the payroll.



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Old 10-16-2017, 06:31 PM
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Great, thank you for the response.



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