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Q: Business Tax Question ( Answered 4 out of 5 stars,   0 Comments )
Subject: Business Tax Question
Category: Business and Money > Accounting
Asked by: zenryan-ga
List Price: $50.00
Posted: 26 Apr 2006 03:36 PDT
Expires: 26 May 2006 03:36 PDT
Question ID: 722924
In 2004, I filed my 1120 for my former corporation late and under
pressure by the IRS.  I used TaxCut Business to get it done quickly. 
For better or worse, I handled my personal income by filling in
Schedule E, Line 4 (Compensation to Officers).  I still have to file
my personal taxes for 2004... but I have not issued myself a 1099 or
W2.  Aside from filling out my 1040 for 2004, do I also need to do a
1099 or W2?  Can I put it as miscelaneous income?  Which is best?  If
I need to do the 1099 or W2, where do I get the forms?  Thanks for
your help.
Subject: Re: Business Tax Question
Answered By: richard-ga on 26 Apr 2006 14:47 PDT
Rated:4 out of 5 stars
Hello and thank you for your question.  You would be better off
receiving your income from the corporation on Form 1099 rather than
Form W-2, but it's very unlikely that you qualify to use Form 1099.

Form 1099:

"If you must file any Form 1098, 1099, 5498, or W-2G with the IRS and
you are filing paper forms, you must send a Form 1096 with each type
of form as the transmittal document. You must group the forms by form
number and submit each group with a separate Form 1096. For example,
if you file Forms 1098, 1099-A, and 1099-MISC, complete one Form 1096
to transmit Forms 1098, another for Forms 1099-A, and a third for
Forms 1099-MISC. Specific instructions for completing Form 1096 are
included on the form. Also, see Transmitters, paying agents, etc. on
page GEN-9. For information about filing corrected returns, see
Corrected Returns on Paper Forms on page GEN-12."

Form W-2:

Employees get Form W-2 while non-employees ("independent contractors")
get Form 1099.

Who Are Employees?

I would expect that a corporate officer is an employee under the IRS test:
"Both of these forms are called information returns. The Form W-2 is
used by employers to report wages, tips and other compensation paid to
an employee. The form also reports the employee's income tax and
Social Security taxes withheld and any advanced earned income credit
payments. The Form W-2 is provided by the employer to the employee and
the Social Security Administration. A Form 1099-MISC is used to report
payments made in the course of a trade or business to another person
or business who is not an employee. The form is required among other
things, when payments of $10 or more in gross royalties or $600 or
more in rents or compensation are paid. The form is provided by the
payor to the IRS and the person or business that received the

"It is your [company's] responsibility, as an employer, to file Copy A
of Form W-2, Wage and Tax Statement, with the Social Security
Administration (SSA) for your employees, showing the wages paid and
taxes withheld for the year. Since Form W?2 is the only document used
to transmit information on your employees' social security and
Medicare wages for the year, it is very important to prepare the forms
correctly and timely.
There are separate Form W-2 and W-3 Instructions. Use Form W-3,
Transmittal of Wage and Tax Statements, as a cover sheet when filing
one or more Forms W?2 with the SSA."

"The official Form W?2 comes in 6 copies. Copy A must be sent to the
Social Security Administration with the transmittal Form W?3 by the
last day of February for the current tax year. Form W?3 is used to
transmit the Forms W?2 and contains figures reflecting the box totals
of all the Forms W?2 being sent. The address for mailing Copy A of the
Forms W?2 and/or W?3 is listed in the separate Form W-2 and W-3

[The penalty for late filing is described on page 8 of the .pdf]

You ask whether 1099 or W-2 is best.  As I noted above, unfortunately
1099 is best, because there are serious consequences if your
corporation paid W-2 wages to you without proper income tax
withholding.  If you think you can justify using Form 1099 instead of
Form W-2, then even if you turn out to be wrong you might avoid
penalties if you can fit within the "Tips" described here:
IRS Offers Tips on How to Correct Reporting of Misclassified Employees,,id=155756,00.html

Employment Taxes and the Trust Fund Recovery Penalty (TFRP),,id=131889,00.html

Search terms used:
employer penalty failure withhold
employee independent w-2 1099

Good luck and thank you again for letting us help.

Google Answers Researcher

Request for Answer Clarification by zenryan-ga on 26 Apr 2006 22:02 PDT
Thank you very much for your thorough answer.  One small
clarification: does the fact that I put the amount on the 1120,
Schedule E, Line 4 dictate that I should either file a 1099 or W2?  Or
is that an irrelevent detail?

Clarification of Answer by richard-ga on 27 Apr 2006 05:15 PDT
Not every officer has to be an employee, so reporting officer
compensation on Form 1120 Schedule E shouldn't be determinative.

"You may find yourself in a situation where you work for the S
corporation, partnership, etc. in a capacity as an independent
contractor. For example, you're the president and a 50% shareholder of
Madison Inc., which owns a retail store. You're also a licensed
plumber. You do extensive plumbing work in the store which you bill
through your plumbing business. As long as the charge is based on an
arm's length transaction, there should be no problems. Similarly, the
corporation could be one of several related businesses where another
corporation performs management functions for the other businesses.
Again, the charge should be based on an arm's length transaction."
zenryan-ga rated this answer:4 out of 5 stars

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