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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29941
Experience:  Taxes, Immigration, Labor Relations
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Lev! Need your help on a partnership Scorp question. I

Customer Question

Hi Lev! Need your help on a partnership Scorp question.
JA: Thanks. Can you give me any more details about your issue?
Customer: I actually saw a portion of a conversation you were having with someone else, so I figured you would be the best one to reach out! Its about flow through to 1040s, guaranteed payments, and FICA liability... Here is the meat of it... and where I am hoping you can help...A partnership pays guaranteed payments to S-corp, no FICA there. Partnership deducts the guaranteed payments on line 10 of its 1065. Then S-corp includes this on line 1 of its 1020-S as its ordinary income and then passes to owner as ordinary income. So, in the end no employment or SE tax is paid on these guaranteed payments?
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Submitted: 1 year ago.
Category: Tax
Customer: replied 1 year ago.
Have you received the payment?
Expert:  Lev replied 1 year ago.

You are correct - that income passed to shareholders which is reported on K1 is NOT subject to neither employment taxes nor self-employment taxes.

Expert:  Lev replied 1 year ago.


Corporate officers are specifically included within the definition of employee for FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax Act) and federal income tax withholding under the Internal Revenue Code. When corporate officers perform services for the corporation, and receive or are entitled to receive payments, their compensation is generally considered wages. Subchapter S corporations should treat payments for services to officers as wages and not as distributions of cash and property or loans to shareholders.

The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state "Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation."

The amount of the compensation will never exceed the amount received by the shareholder either directly or indirectly. However, if cash or property or the right to receive cash and property did go the shareholder, a salary amount must be determined and the level of salary must be reasonable and appropriate.

If there is an income passed on K1 from S-corporation and there is NO wages - that would be a red flag for the audit.


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