Hamlet the Prince wrote:
- quote -

shareholders are not automatically employees.

- quote -

But officers working are.

Cheer$,
Harlan Lunsford, EA n LA

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miriam[at]pstein.com (MK) wrote:

- quote -

The 100% shareholder is almost certainly an employee of the
S-Corp. As an employee, the individual should be reasonably
compensated. To the extent of this compensation, the S-Corp
and the employee would pay employment taxes (not considered
self-employment though).

Last year the Tax Court case of Veterinary Surgical
Consultants, TCM 2003-48 had a good discussion of when an
officer of an S-Corp is an employee. Some other cases of
interest include: Joseph M. Grey Pub. Accountant, P.C. v.
Com'r, 119 T.C. 121, and Spicer Accounting Inc. v. U.S., 918
F.2d 90.

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MK wrote:

- quote -

Which first, the good news or the bad?

Okay, good news first.
No, his earnings are not subject to SE tax.

the bad news is that he should be drawing a regular and
reasonable salary for his services from the corporation. In
this manner social security tax is paid (as it should be)
and federal and state withholding are assessed and paid over
to IRS and state, so his W-2 at year's end will detail his
earnings. Then....... any profit left over (and there
should be some) will flow through to his own 1040.

Cheer$,
Harlan Lunsford, EA n LA

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MK wrote:

- quote -

Self-employment tax? Well that *exact* question is easy--no
<grin> . Section 1402 does not apply to payments received
either as wages or dividend distributions.

The bigger question is whether there is a *FICA* or
*Medicare* tax liability on any payments he received that
were disguised salary.

There are problems cases: Spicer Accounting (66 AFTR 2d
90-5806, 918 F2d 90, 91-1 USTC P 50103) and Radtke (63 AFTR
2d 89-1469, 712 F Supp 143, 89-2 USTC P 9466). In both
cases, a one man service corporation paid no salary to the
sole owner, but did pay out distributions as dividends. The
IRS contended those payments were actually payment for the
individual's services and not dividends. As well, they
argued those payments were salary.

--
Ed Zollars, CPA
Phoenix, Arizona

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If an individual is 100% shareholder of an S-corp for which
the sole income of the S-corp are from the services he
provides, would he be subject to self employment tax on his
net income from the s-corp? Are there any cases supporting
the above? Can you provide the references please?

Thank you.

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