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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
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I AM HAVING A HARD TIME UNDERSTANDING SELF EMPLOYMENT INCOME

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I AM HAVING A HARD TIME UNDERSTANDING SELF EMPLOYMENT INCOME AND LINE 7 COMPENSATION OF OFFICERS, AND LINE 21OF FORM 1120S. wHAT IS THE DIFFERENCE
Submitted: 1 year ago.
Category: Tax
Expert:  Stephen G. replied 1 year ago.
Hello, my name is***** & I'll be helping you today. My goal is to give you a complete & accurate answer that you can understand.
Compensation of Officers, line 7 is used to report the Officer's Gross Payroll Expense as reported on Forms W2 for just the officers of the corporation.
In a Sub-S Corporation, there is no self-employment income unless the corporation attempts to report payments to the owners (which are actually distributions of profit) as consulting income & the S-Corp send the owners 1099s.
The IRS currently has a special audit project that is directed at S-Corps where the owners/officers of the S-Corp, who work in the business, attempt to report very little (or no) formal payroll (W2s) and therefore pay no Social Security and Medicare taxes.
In those cases, the S-Corp risks having any & all payments (of any kind) to the owners/officers as compensation subject to corporate payroll taxes & employee withholding for the owners/officers. Naturally, by the time you add all the penalties & interest, the tax bill is devastating and disastrous in terms of being able to pay the assessments.
Just as an aside, (not a recommendation), possibly to help your understanding, if you were operating as a Partnership, the line 21 that you are referring to, ie. the profit, would be classified as self-employment income and would be subject to Self Employment tax. In a partnership, the partners may not be on their own payroll.
Please let me know if I can answer any follow-up questions you have or if I can clarify anything I've written.
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