Can I 1099 myself from my S Corp?
Understanding the intricacies of tax laws and regulations can be a daunting task for small business owners, especially when it comes to determining how to handle employee compensation. One common question that arises is whether an individual can be 1099’d from their own S Corp. This article delves into this topic, exploring the legalities and implications of this practice.
What is an S Corp?
An S Corp, or Subchapter S corporation, is a type of business entity that provides limited liability protection to its shareholders while allowing pass-through taxation. This means that the income, deductions, credits, and other tax attributes of the corporation pass through to the shareholders, who then report these items on their personal tax returns. This structure can be beneficial for small businesses, as it allows them to avoid double taxation that is common with C Corporations.
Can I 1099 myself from my S Corp?
The short answer to this question is no. According to the IRS, an S Corp cannot issue a 1099 to its shareholders for services rendered. This is because shareholders are considered employees of the corporation, and the IRS views them as receiving a salary for their work. As such, the corporation must issue a W-2 to its shareholders, not a 1099.
Why can’t an S Corp 1099 its shareholders?
The rationale behind this rule is to prevent tax evasion and ensure that shareholders are properly reporting their income. If an S Corp were allowed to 1099 its shareholders, it could potentially create a scenario where the shareholder’s income is not reported on their personal tax returns, leading to tax avoidance.
What are the alternatives?
If you are a shareholder in an S Corp and wish to be compensated for your services, there are a few alternatives to consider:
1. Salary: You can receive a salary from the S Corp, which would be reported on a W-2. This salary should be reasonable and in line with the market rate for similar services.
2. Dividends: You can receive dividends from the S Corp, which are reported on Schedule B of your personal tax return. Dividends are not subject to payroll taxes, but they are subject to income tax.
3. Retained earnings: You can choose to retain earnings within the corporation and reinvest them back into the business.
Conclusion
In conclusion, an S Corp cannot 1099 its shareholders for services rendered. It is important for small business owners to understand the tax implications of their business structure and ensure they are compliant with IRS regulations. If you have any doubts or questions about how to compensate yourself from your S Corp, it is advisable to consult with a tax professional or accountant to ensure you are following the correct procedures.
