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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4037
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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I am the sole owner of a C-Corp. in California. The Corp.

Customer Question

I am the sole owner of a C-Corp. in California. The Corp. is a Mortgage broker/lender and also handles Real Estate sales transactions. Since I am the only licensed Broker/salesman, I collect commission for closed transactions and get a 1099 from the Corp. I have been told as the sole owner I should be on payroll. Is this correct? If so, can I payroll myself a small salary and 1099 for the commission transactions? Finally, would it make a difference if I were not the sole owner and was only partial owner?
Submitted: 3 years ago.
Category: Tax
Expert:  Stephen G. replied 3 years ago.

Stephen E. Grizey :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything you don't understand.

Customer:

Ok great, thanks.

Stephen E. Grizey :

This gets a little tricky in your particular circumstances; the reason being that brokers/salesmen in your industry are paid on commission as a matter of practice.

Stephen E. Grizey :

Normally, in the circumstances of an owner of an "C" corporation (or an S-Corp for that matter) your compensation should come out through a payroll as an employee;

Stephen E. Grizey :

The ownership percentage really doesn't matter, or factor into this particular decision; the fact that you are an owner just tends to draw attention to the issue.

Stephen E. Grizey :

Personally, if you were my client, primarily because of my audit experience with clients being audited on this very issue, I'd probably have you take a relatively small salary, say 20%-25% of your total expected compensation as compensation for "managing the business & taking care of all the administrative duties" & then take the rest out in your commissions.

Customer:

So it sounds like it is somewhat gray? The way I do it now I only take money out when it is earned via commission attached to specific transactions so as to run it properly as if we had multiple employees. At one point we have 3 owners and 10 employees and will possibly again in the future.

Customer:

I am glad you said that it is the very reason I asked. I have a CPA who only sees black and white and says all money must be payroll "end of story." That seemed so definitive and strange to me though. I suggested exactly what you proposed and she shot it down but I will go ahead and take your advice.

Stephen E. Grizey :

One thing to be careful about is treating any non-commission compensation for anyone (a secretary of administrative assistant) as a independent contractor (1099); that isn't justified by "industry practice" - industry practice is the only thing that changes the circumstances from the normal situation of owner compensation to your unique situation.

Stephen E. Grizey :

What do you mean 10 "employees"................you aren't treating them as employees for compensation purposes are you?

Customer:

That makes sense. I would put any non-agent on payroll for sure and did so in the past.

Stephen E. Grizey :

See, just using that term is a giant no - no.

Customer:

No and forget the 10 employee thing I was giving you info that is no longer important. Before I became sole owner our company was made up of about 10 people. All secretaries and managers were on payroll and licensed agents were Indep. Contractors.

Customer:

what term?

Stephen E. Grizey :

They are employees is they are reported on 1099s - they are independent contractors & by the way, you should have written contracts with them setting forth their general duties & compensation method & getting their ss#s & getting their confirmation that they understand their arrangement with the company & that they are independent contractors.

Customer:

oh employees? I get it. Going forward the only "employees" I would have would be administrative assistants on payroll. Anyone else associated with the company would be independent contractor real estate and or loan agents not "employees."

Customer:

Yes, i am aware of the need for written contracts for sales agents. Currently I have no agents but I would certainly do that if I take any on.

Stephen E. Grizey :

The first time one of them gets disgruntled over something & heads for the unemployment office will be when you are glad you have a written contract. Generally the way it works is that they are employees (irrespective of how they are compensated) until you prove otherwise.

Stephen E. Grizey :

If you were to lose on this point, it would be disaster.

Stephen E. Grizey :

The term I was referring to is calling them "employees".

Customer:

Thank you so much for your thorough explanation it makes a lot more sense now.

Stephen E. Grizey :

Let me ask you one question.

Customer:

sure

Stephen E. Grizey :

Who is telling you that you should be an employee? An accountant or ?

Customer:

The CPA who files my corp. tax returns insists since I am sole owner I MUST be on payroll for ALL compensation no matter what.

Stephen E. Grizey :

Yeah, I'm not surprised. It is a battle with the IRS we don't like to fight. I would normally be telling you the same thing had I not gone through this with real estate & insurance people; the insurance is a little different as they have another classification called "statutory employees".

Customer:

Your advice makes sense and is how I pictured it because you should be allowed to separate ownership duties and commission duties since as you point out, commission based earning is the nature of Real Estate

Stephen E. Grizey :

If he's a reasonable guy (your CPA) he may reconsider based on the industry practice; one other issue is that the mortgage broker compensation isn't as clear; that is all over the place; I've only handled one of them & everything was paid to him as an employee; he wasn't technically an owner although he considered his customers his clients.

Stephen E. Grizey :

Real estate is an extremely well established industry practice.

Stephen E. Grizey :

It kind of follows an old CPA saying.......pigs get fat; hogs get slaughtered;

Stephen E. Grizey :

You don't want to fall into the "hog" category;

Customer:

Hog equals greed right?

Stephen E. Grizey :

Having some compensation (not just a minor amount lie $5,000.) but based upon more like 20 -25% of the total keeps you in the "pig" category...............

Stephen E. Grizey :

But obviously, this is all subjective & we have to be prepared to argue it if necessary.

Stephen E. Grizey :

Right, a little greed is ok; a lot of greed is usually death........the IRS has time & money on their side so the best and (really the only way to win on this) is at the grass roots with the agent; once he writes it up as disagreed & it goes up the line, the chances diminish no matter how right we are; it simply costs too much to fight it;

Customer:

If an audit did happen and it was determined we were doing something wrong would the punishment be a big tax bill now owed or are we playing with jail time issues? I worry that ignorance of the tax law could get me in trouble since I have never knowingly done anything improper... i ask because perhaps it is not worth the hassle of having a Corp. since I am really the only person I may be better off as a sole proprietor? I will need to figure this all out soon I guess :)

Stephen E. Grizey :

One thing I did with this a couple of times is have the owner devote 1 day a week to administrative things.............playing golf, taking me to lunch, whatever;.............that's where the 20% came from; so I'd argue that to the agent; he doesn't sell on Friday; that's an administrative day; just don't forget that if the agent shows up on a thurs & friday...................:]

Customer:

That works!

Stephen E. Grizey :

Jail, hardly.................please, unless you're selling drugs out of back office...............

Stephen E. Grizey :

Corps aren't what they use to be due to changes in the tax law; I usually tell clients, figure $2,000. extra to have a corp based on increased cost of compliance; certain insurances; etc., etc. You can buy a lot of liability insurance for $2,000.

Customer:

Ha no drugs but good to know - I just see all these celebs going to jail for tax reasons but I guess not filing is worse than filing incorrectly

Customer:

Last Question: My wife was an employee of the truest sense and even had a time card at her old job. She was ignorant and young at the time and thought her taxes were being taken out. It turns out her employer filed 1099's and treated her as an independent contractor. We recently were sent back taxes due from this time period still owed to the IRS. Based on what you just told me it sounds like she has a legitimate dispute. Does she? Is it worth disputing or would that just cause the IRS to delve further into her entire tax picture (aka me now)?

Stephen E. Grizey :

Plus it is rare to see a small business that keeps all the records up-to-date; usually there's like 10 annual meetings the day before the IRS arrives...............they have to make an appointment like anyone else..................

Stephen E. Grizey :

Not filing isn't the issue; NOT PAYING is the problem.

Customer:

Gotcha

Customer:

Regarding Business records/corp. minutes are monthly meetings required or just annual?

Stephen E. Grizey :

As far as your wife is concerned, how old is the problem; ie. when was the last time she worked there?

Stephen E. Grizey :

Annual.

Customer:

I want to say 2005

Stephen E. Grizey :

So what happened? she didn't file?

Stephen E. Grizey :

Was this before you were married?

Customer:

it went on from about 2001 - 2005 and my concern from an outsiders perspective it i sort of like c'monlady why didn't you look into this a long time ago. She was embarrassingly ignorant and flaky about it so it may be best to just pay it off

Stephen E. Grizey :

How much is it?

Customer:

Yes, before we were married

Customer:

now it is about $10K-$13K

Customer:

I was going to go on an installment plan but my personal tax preparer said that just puts you on the IRS radar and it is better just to pay it off and move on

Stephen E. Grizey :

So she didn't file, thinking taxes were taken out?

Customer:

She said she filed 1 or 2 years to try and get a return but most years no file. Yes, she thought taxes were coming out

Stephen E. Grizey :

Without winding up sleeping on the coach by telling me, how old was she during this 2001-2005?

Customer:

19-23

Customer:

my dates could be off it may have been 1999-2003 but you get teh idea

Customer:

the

Stephen E. Grizey :

I'm asking because 1) I don't agree that it puts you on the "radar"...........as a matter of fact it is her obligation not yours (even though you'll be paying it) & 2) a good portion of it is probably penalties which with the right letter/excuse/etc. you can probably get removed; especially given her age; but you'll need your CPA to write the letter;

Stephen E. Grizey :

Yeah, I get the idea, now just don't tell me you're 50.

Customer:

haha 30

Stephen E. Grizey :

ok, that makes me feel better

Stephen E. Grizey :

What state are you in?

Stephen E. Grizey :

Same state now that she worked in?

Customer:

We live in CA and she worked in CAWell I get it is not my debt, but we file jointly since 2008 or 2009 and she files as a housewife. i was due about $3,000 in returns this year and the IRS automatically applied the return to her debt which is why I was concerned it would start affecting my filings or raise redf lags.

Customer:

sorry for the sloppy replies I am not use to this chat mode

Stephen E. Grizey :

ok no problem, at least it isn't spanish

Customer:

PS if I was 50 and you knew how hot my wife was you'd say it is AWESOME you are 50 LOL

Stephen E. Grizey :

So, she basically ignored this all this time?

Stephen E. Grizey :

Hot is good & bad at the same time..........the voice of experience talking here..way past 50.

Customer:

pretty much...already had that loud fight because I am way too conservative to ever do that...and as I mentioned she is a looker so I got over it

Customer:

She said she paid chunks when she could...not the smartest ormost responsible move

Stephen E. Grizey :

You know the old real estate advice; get a "lot" while you're young!

Customer:

I know what you mean...hot is fun for you but they get away with more and you have pretty much the entire male population as competition to steal them away...they can suck you dry for 20 years and find a younger better looking richer guy...but that "love" crap is such a wonderful piece of denial enabling blindfold ha ha

Stephen E. Grizey :

If I was on this, I'd handle another way, but the timing is difficult; most guys won't bother with it; but this is quite a bit of money, even for a mortgage broker.......but I guess you gotta take the bad with the good; all in all...........sounds like you're ahead of the game;;;;;;;;;;;;;;;

Stephen E. Grizey :

where are you in California..............not your street address; just generally geographically

Stephen E. Grizey :

San Diego? or San Francisco?

Customer:

I just tell her if she ever wants to leave try and do it while I still have either the looks or money to keep getting laid! ha ha

Customer:

South Orange County

Stephen E. Grizey :

Money is the better choice in the end.................

Stephen E. Grizey :

Careful what you say here.............this isn't confidential............that's why no names for "customers".

Customer:

Back to the serious stuff...what do you mean you'd handle another way? I frankly don't want to bother with the debt but wasn't sure if you were making a joke meaning don;t marry a girl with back taxes or if you are serious there is a way to do this. If you are saying filing jointly doesn't affect things or raise flags I would like to at the bare minimum get on an installment plan.

Stephen E. Grizey :

OK, are we pretty much done?

Customer:

Or ideally, fight it. Do you think the fact she ignored it for so long makes dispute silly?

Customer:

oh whoops thanks for the heads up...i was being completely sarcastic anyway

Stephen E. Grizey :

Not silly at all, but you can't fight yourself & win............you need someone who has the experience to work on it without it costing more than he can save you..............

Customer:

OK...BUT....an installment plan is fine if they agree to it right? I'd like to at least get on a plan so it does not appear we are trying to ignore the debt.

Stephen E. Grizey :

I'd write a couple of letters & see what happens. The can't forgive interest, unless the taxes are wrong; the years are "closed' unless she didn't file, in which case they never close; the problem is that if she has paid money toward the bill, we don't know the facts re what they've charged; how much is tax, penalties, interest; she won't have any records; multiple years are involved ;the infor has to come from the IRS, this all takes time, effort, money (fees), so it definitely is a problem;

Stephen E. Grizey :

If there's an installment agreement it should be in here name only; it has nothing to do with you except that you have to pay it...............

Stephen E. Grizey :

Yeah, they'll give you a plan because if they don't you don't pay; how are they going to squeeze it out of your wife? She's not working; must not be rich or she would have paid it long ago just to get rid of it.................

Stephen E. Grizey :

here = her

Customer:

that is what I was telling you...I thought the same thing but this last year, instead of sending me my return they applied it to her debt and took my whole return (only $3K).

Stephen E. Grizey :

Yeah, no question about it; did you make estimated payments?

Customer:

yes

Stephen E. Grizey :

So you need to figure the estimates better so you pay in 90% or even less; worse case you pay some interest...................but you don't overpay.......................

Customer:

I get it now though...On years I don't qualify for a return I won't have to pay toward the debt if it remains in her name. If I do get a return they take it until the debt is gone. Sounds fair so we are good

Customer:

Do I just hit accept now?

Stephen E. Grizey :

I believe that once you have an installment agreement in place they won't try to collect it any other way as long as you make the payments.

Stephen E. Grizey :

I just hate to see someone pay all those penalties which are probably at least half of what she owes.

Customer:

I will have her write a letter to at least try and get the penalties removed based on the reason she was being dealt with improperly by her employer...worth a try

Stephen E. Grizey :

Yeah, you can hit ACCEPT, give me a giant bonus >00<; a great feedback; whatever; if you need me again, just ask for Steve G. at the beginning of your question...

Stephen E. Grizey :

Thanks, XXXXX XXXXX with you......................

Stephen E. Grizey :

ok, look, hold on a minute.................

Customer:

Likewise and thank you....when you said this is not private do you mean because the company sees it? i hope this isn't public conversation? Either way I will give you the maximum positive review...take care

Customer:

ok holding

Stephen E. Grizey :

After you accept, this turns into a question/answer format; if you are going to have her write a letter, give me some time; say until tomorrow morning & I'll give her some phrases to include in the letter & maybe that will help.....................deal?

Stephen E. Grizey :

The conversation doesn't identify you, just me because i choose to put my name behind what I say.

Stephen E. Grizey :

I can't email you because we can't do that under the JustAnswer rules & your email would be automatically x'd out even if you were to try & give it tome.

Stephen E. Grizey :

You might be able to find me; but there's no need to do so.

Customer:

How do I get the phrases to include form you then?

Stephen E. Grizey :

Just come back to this question; I won't close it out; but you can always retrieve it anyway. It will be listed with your customer number, name or whatever.

Stephen E. Grizey :

Once you ACCEPT, you'll see it leaves chat & goes to the Q/A section.

Customer:

OK...great...this is an awesome service!

Customer:

Accepting now so have a great day

Stephen E. Grizey :

If you have a problem just ask for me in a question; I'll get an email that's says your looking for me.

Customer:

perfect

Stephen E. Grizey :

Or better yet send your wife. does she like older men? Yet?

Stephen E. Grizey :

there's no substitute for experience >00<

Stephen E. Grizey :

Ok, time to go.................ACCEPT./..............................

Customer:

haha I hope she doesn't like them until I am old

Stephen E. Grizey :

Right. You behave

Stephen E. Grizey :

Community property sucks

Customer:

with my luck she will like younger men then to feel younger herself!

Customer:

haha i know...I think I am one of the lucky ones

Customer:

I know that is what most guys think until they get served with divorce papers though LOL

Customer:

She is a special one though...ok talk to you tomorrow

Stephen E. Grizey :

Look, the single biggest mistake is not to pay attention to them - you have to LISTEN as painful as it is siometimes'

Customer:

Truth

Customer:

Adios

Stephen E. Grizey :

bye for now

Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4037
Experience: Extensive Experience with Tax, Financial & Estate Issues
Stephen G. and 11 other Tax Specialists are ready to help you
Expert:  Stephen G. replied 3 years ago.

I haven't completely forgotten about you, just got busy, distracted, CRS setting in, etc.
I'll work on what we discussed & post it here now............................
Expert:  Stephen G. replied 3 years ago.
OK, here are a few ideas for your (your wife's) letter .....................

1. I think you need to ask for a transcript of her account in order to see what has been computed as owed, the tax, interest & penalty amounts. Unfortunately, when you don't file, the IRS makes up the numbers based either upon the gross income reported to them (in your case on the 1099s) or on a prior year's gross, often increased by some factor - 25%+ . In other words, the tax & thus the penalties & interest are based upon ficticious numbers & you may not even owe the taxes that they say you do.

2. In regards to any years that you didn't file at all, you can still file & use the correct numbers for the actual 1099s as well as any personal exemptions and the standard deduction that you were entitled to. Obviously, you are going to need someone to review the transcripts (you may receive a separate one for each year involved) in order to determine if it is worthwhile to pursue. Any CPA can look them over, ask you a few questions & determine if it is worthwhile to attempt to get the amounts adjusted based upon how they computed the tax.

3. If it comes down to the penalties only which have been assessed (in other words the tax is correct & interest they can't reduce unless the tax gets reduced) then it is probably worth writing a letter of explanation to attempt to have the penalties reduced.

Most likely you have been assessed penalties for failure to file (5% a month to a max of 25%), failure to pay (1/2% a month to a max of 25%); plus there are other penalties for failure to make estimated taxes & some others that I won't mention at this point.

The thrust of any letter attempting to get the penalties reduced should point out:

1. You thought you were an employee & taxes were being withheld; you were very young & inexperienced; it was one of your first full time jobs; you never thought you were self-employed - didn't even know what that was -; you didn't own the business; you worked regular hours; you were told what to do & how to do it; you were supervised by your "boss" and reported your progress with his assignments several times during each work period; didn't understand the difference between a 1099 & a W2; so you should be saying things like....................

I respectfully request that the penalties for failure to pay the tax when due be abated for the reasons outlined;

You can point out that you thought your employer had "paid all the tax that you owed by withholding them from your pay"; you never got any breakdown of your paychecks but since you were hired as an employee you presumed a businessman would be taking care of everything that he was supposed to do with your taxes;

You were only 19 at the time & were intimidated by your boss & didn't want to question him about how your pay would work; you were just glad to have a job & didn't want to cause trouble or lose your job.........................

You want to say that you fully expect to pay all the income tax that you owe, but you don't feel you should be penalized for someone else's failure to treat you as an employee when in fact that what you were & to attempt to say that you were self-employed (which is what you now understand your former employer has done by sending you 1099s rather than withholding income taxes & sending you a W2 like he should have (in order to save himself payroll taxes) is patently wrong & a complete misrepresentation of the facts or your employment.

So, what you should do now is to look over this material which I've summarized based upon what your husband told me & put it in your own words & write a letter to see if you can get the penalties reduced.

However, you really should have someone determine what it is you actually owe, what the breakdown is, how much you've already paid toward the bill & basically where you stand.

It sounds like it may be worthwhile to pursue this as there is a lot of money involved.

I wouldn't worry about drawing any particular attention to your husband's & your income tax situation now; this all involves past year's problems before you were married.

Hope this helps & if you need any additional assistance, I'll be glad to help if I can. Good luck, I know this is a giant PIA.

SEG

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