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Stephen G.
Stephen G., Sr Financial Expert
Category: Finance
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Experience:  Extensive Experience with Tax, Financial & Estate Issues
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We are 2 shareholders in a California S corp. Our corporate

Customer Question

We are 2 shareholders in a California S corp. Our corporate CPA issued W-2 with dividends in 2015. For 2016 he is suggesting we do 1099s with dividends. I live in Washington state and partner in California. We work very little for the corporation as we license a product to a manufacturing and sales. My personal CPA in Washington state says No way. What are your thoughts?
JA: The accountant will know how to help. Is there anything else important you think the accountant should know?
Customer: Not at this time. When will I have a response?
Submitted: 15 days ago.
Category: Finance
Expert:  Stephen G. replied 15 days ago.

Hello, my name is***** goal is to give you a complete & accurate answer. I am working on your request now & I will respond as soon as possible.

Expert:  Stephen G. replied 15 days ago.

What exactly do you mean when you say "issued W-2 with dividends for 2015"?

Do you mean that you received a salary as reported on your W2 as well as the profit allocation from your K-1?

In an S-Corp, what you may be calling "dividends" are actually distributions of a portion of the profits from the K-1; they aren't taxable because they are already included in the profit allocations from the K-1.

If the question you're asking is whether or not it is advisable to report W-2 salary as Non-Employee compensation on a 1099, I would strongly recommend that you not do that.

It sounds like your accountant is reclassifying distributions during the year as salary at the end of the year and only running it through payroll at that point?

One of the areas that the IRS is focusing on now are "S-Corps" where the owners don't take salaries but try to take the profits out as distributions to avoid payroll and self-employment taxes. If you were to substitute 1099s for W2s, you'll have to pay self-employment taxes on the 1099 income, unless you are over the SS limit on another job.

What is the reason your CPA is recommending this alternative?

Steve G.

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