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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I am the owner of an S corp. I used to be the main sales

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JA: Hello. How can I help?
Customer: I am the owner of an S corp. I used to be the main sales person for the company. I was injured in 2010 . I am a paraplegic and I have extreme low back pain. I am set up now to "work" from home, which involves looking at reports, Some advertising decisions, answering questions for employees and occasionally calling customers etc. I have a disability insurance policy which required me to apply for SSDI. My attorney at the time said I was not required to report distributions, only my salary of approx $10,000/ year at the time. 3 years ago SSDI sent a work activity report. I contacted a different attorney to ask again about the distributions. I was told by them that I did not need to report it.SSDI just sent me another Work Activity report. Is it standard procedure for them to do this every 3 years? I am getting a little concerned and want to be sure that just reporting my salary of approx $13,000 is not going to cause any issues. The main reason I don't want to lose the SSDI is because of Medicare. Is it possible to not be on SSDI and still recieve Medicare because of my disability ?
JA: The Expert will know how to help. Is there anything else important you think the Expert should know?
Customer: I take approx $ 52,000 in distributions from the Corp. I "work" about 15-20 hours a week as needed.

The Social Security Disability program does NOT put a limit on the amount of assets or UNEARNED income you can have.

A person collecting SSDI can have any amount of income from investments, interest, etc.

Earned income is income from wages and self-employment income.

According to the SSA - like any other corporation, an S corporation is separate and distinct from its shareholders. The basic difference from other corporations is it does not pay Federal corporate income tax. Income is passed directly to the shareholders for Federal income tax purposes. The corporation is carrying on any trade or business. The shareholders are not self-employed nor is their income NESE.

The income from an S corporation may take three forms:

  • Wages, received by shareholders as employees of the corporation,

  • SEI, for fees paid to a corporate director,

  • Dividends, paid to shareholders.

For disability purposes ONLY wages and self-employment income are considered.

You should NOT report any other income distributed to you from S-corporation as to shareholders for disability verification purposes.

Here are two interconnected issues - as the situation is related to Social Security Disability and to Tax law and regulations.
1.

The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.

Having all profit reported on K1 and not having ANY wages - will most certainly trigger an audit - and self-employment taxes will be likely assessed on that income. As a result - SSA will be updated on fact of having earned income and the substantial gainful activity (SGA) - depending on circumstances that might disqualify from being a disabled.

.

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.

There are no specific guidelines for reasonable compensation in the Code or the Regulations. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of each case.

2.
On the other hand - the Social Security Administration (SSA) to qualify the person as disabled - will examine the substantial gainful activity (SGA). A person who is earning more than a certain monthly amount (net of impairment-related work expenses) is ordinarily considered to be engaging in SGA. In 2017, the SGA amount is $1,170 per month.

See here

https://www.ssa.gov/oact/cola/sga.html
The disabled person may own the business - that is not an issue - and may receive an income from that business. However in this case SSA will specifically determine if that profit related to SGA or not.

In such examination the SSA will apply “The Three Tests” - if you:

-- if the person provides significant services to the business and receive a substantial income from it

-- if the person performs work that's comparable to the work of persons without disability in your community engaged in the same or similar businesses, or

-- if the person performs work that's worth $1,040 per month in terms of its value to the business or what it saves you from having to pay an employee to do the work.
The fact of substantial income from S-corporation MIGHT affect eligibility for SS disability benefits.
However - if the person for instance will be able to proof that he personally do not work for the S-corporation and all work is done by others - family members or hired employees - most likely eligibility for SS disability benefits will not be affected.
If however - all work is done by the disabled person and income from that activity is above $1,170 per month (in 2017) - there risk is very high that SSA will consider the person as be engaging in SGA and SS disability benefits could be disallowed.
So far - as summary of the above:
- there is no yes-no answer.
- the situation might be affected by both SSA and IRS
- the eligibility depends of circumstances and SSA evaluation if a person is unable to engage in substantial gainful activity (SGA).

Customer: replied 1 month ago.
Thank you, ***** ***** very helpful. So, basically the the less I work or do for the Corp. the better ?

For disability purposes - the SSA will determine your ABILITY to work.

When you ACTUALLY work - that could be used as an indication of your ability.

It would be much more simple case and will help the SSA officer to make a determination in your favor if you do not work at all.

Lev and other Tax Specialists are ready to help you

Specifically - if your work may be classified as the substantial gainful activity (SGA) - which in SSA view is the work that provides above $1,170 per month (in 2017)

If you do perform any services for S-corporation or provide just minor services - you might not receive wages at all - only distribution, but that may raise questions from the IRS - in this case you will need to proof that the S-corporation is operating by hired management. If wages are paid to employees - there should not be any issues with the IRS.

It’s important to understand that the IRS and the Social Security Administration have very different rules that govern these determinations. Social Security will make an independent employer-employee relationship determination to establish a worker’s coverage status or to resolve earnings discrepancies. The IRS makes an independent employer-employee relationship determination to establish a worker’s obligation to make Federal Insurance Contributions Act (FICA) contributions and for tax withholding purposes.

While you should be concerned about both - you main concern is SSA.

There are various factors that Social Security can use to determine if an employment relationship exists. These factors are described in detail in POMS RS 02101.000

See here

https://secure.ssa.gov/apps10/poms.nsf/lnx/0302101020

https://www.ssa.gov/OP_Home/handbook/handbook.08/handbook-toc08.html

These documents will be used by SSA personal for determination.