Taxpayer asks:
I own a S-Corporation. If I receive a project from my client and want to subcontract a part of it to another company, where do I show that expense on my business tax return? In deductions, there is a place to show 1099 subcontractor expense. However, this is not really a 1099 sub. It is a corp to corp. So, how do I handle that?
Taxgirl says:
If I understand what you’re doing correctly, you’re taking a job for X dollars and farming part or all of it out to another party to do the job for Y dollars. That party is another company (or individual) and not your employee. Is that right?
If so, then you would either report the payments as nonemployee compensation on a form 1099-MISC (depending on the nature of the compensation and the type of entity) or simply record it as a business expense. Either way, it’s not salary, so I’d put it on line 19 of the 1120-S as “other deduction.” You’ll need to attach a statement with the amounts broken out separately.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
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Taxpayer asks:
Hi Tax Girl,
I had income from multiple sources in 2008 – albeit, not much…it was a bad year 
I briely worked as an independent contractor for a real estate company and received a 1099-MISC for $5,467 of non-employeee compensation.
It was reported under the single member LLC I formed (to my EIN). I created this LLC in June 2008 with the main purpose of pass-through taxation.
In July 2008 I opened a business checking account in the name of my LLC, deposited the $5,467, then wrote myself a check a few days later. I then deposited it into my personal checking account.
For the LLC, I elected to be taxed as an S-corp.
What tax form(s) do I use to report this income, to acheive the pass-through taxation?
Thanks in advance,
Taxgirl says:
The easy answer is that you would file a form 1120-S for the S corporation and then file a form 1040 to report the pass through income. Depending on the type of income, you will likely file a Schedule C (or E) and report any employment income (I’m guessing you didn’t withhold at the S corporation level) paid to you on a Schedule SE.
But gosh that’s a lot of work.
I am not sure why you elected the S status but if it was only for liability protection and pass through taxation, I probably would have advised you to keep the SMLLC. For federal tax purposes, a SMLLC is considered a disregarded entity, which means that you wouldn’t have to file a separate return. You would have simply reported the income on your regular form 1040 – with the appropriate related schedules. No extra returns necessary.
Folks like S corporations for a lot of reasons, but they can often be a bit of overkill for smaller businesses. There are restrictions that can limit your options (health care deductions spring to mind).
I’d highly recommend that you check with your tax pro to confirm that your current set up is what will best meet your needs. You might be able to save some time and aggravation down the road with a structure that’s a bit more simple.
(And psst, tax pros, hold your fire. I know that S corporations can have favorable results in some cases. But be sure and pay attention to the dollar amounts in this post before lecturing me on saving SE tax!)
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
Yet again, s corporations are the most popular corporate entity in the US, representing a whopping 61.9% of all corporate entities!
Nearly 3.3 million S corporation returns were filed for the tax year 2003, an increase of 5.9% from 2002. Total net income reported by S corporations increased to $213.7 billion for Tax Year
2003 from $183.5 billion reported for 2002; nearly 2/3 of all S corporations reported positive total net income.
And while total assets increased $169.9 billion, less than one quarter of 1.0 percent of all S corporations
reported federal tax liability. That’s why, of course, s corporations are being targeted for audit…
Because maybe there is somebody watching me. And that somebody is Uncle Sam.
Yep,
fresh off our firm’s annual unemployment compensation audit (we’ve been
chosen almost every year in a random audit – luckily, no worries), I
read today that IRS released a report that more than 1.2 million
individual federal income tax returns (forms 1040) were audited in
fiscal year 2005, a more than 20% increase from 2004. In 2004, the IRS
had noted a nearly 20% increase in audits. Are you getting a picture
here?
On the corporate side, it’s no secret that the IRS is targeting s corporations for audits.
However, on the personal side, it appears that the IRS might be gunning
for individuals with an income of more than $100,000. Almost 20% of the
individual audits this year focused on that tax bracket, the highest
figure in ten years. Ironically, there were just as many audits for
those reporting under $25,000… Somewhere, the middle class just might
be breathing a sigh of relief (and this is perhaps the only tax
"relief" granted to the middle class this year!).
