The question is, what did the stockholder/employee do to
earn this bonus, and where did he do it?

The general rule of state taxation of earnings from the
performance of personal services (i.e., employment) is that
such earnings have their source where the services are
performed. To the extent that the stockholder/employee
performed the services for which the bonus compensates him
in NE, the bonus is NE source income.

Nebraska applies that rule by incorporating the rules that
determine the state to which an employee is reported for
unemployment insurance purposes under the Uniform
Unemployment Insurance law to determine the source of income
from the performance of services as an employee. The
statute is Neb. Rev. Stat =A7 77-2733(8):

************************************************** **********

(8) Compensation paid by a business, trade, or profession
shall constitute income derived from sources within this
state if:
(a) The individual's service is performed entirely within
this state;
(b) The individual's service is performed both within and
without this state, but the service performed without this
state is incidental to the individual's service within this
state;
(c) The individual's service is performed without this
state, but the service performed without this state is
related to the transactions and activity of the business,
trade, or profession carried on within this state; or
(d) Some of the service is performed in this state and (i)
the base of operations or, if there is no base of
operations, the place from which the service is directed or
controlled is in this state, or (ii) the base of operations
or the place from which the service is directed or
controlled is not in any state in which some part of the
service is performed, but the individual's residence is in
this state.

************************************************** **********

Many states prorate compensation for services performed by a
nonresident within and without the state on the basis of
time. However, Nebraska's is an "all or nothing" rule.
Therefore, assuming that the stockholder/employee's services
during the year were all, or substantially all, performed in
Nebraska, all of his compensation (including bonuses, which
are just another form of compensation for services) is
Nebraska source income.

The S corporation's income would be sourced to Nebraska
based on the single factor of sales. Assuming that the
corporation's sales factor is something less than 100%,
treating it as a bonus would increase, not decrease, the
stockholder/employee's Nebraska source income.

Katie in San Diego

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >

Our firm deals almost exclusively with Texas clients doing
all business in Texas. However, we have one client
incorporated in TX filing as a S corp who this year earned
virtually all its programming service income in NE, which
has a state income tax. The programmers that performed the
service resided in and worked in NE. The owner, whose tax
residence is TX spent nearly the entire year in NE too and
took a salary there classified as NE salary of $125k.

The company is projected to make about $300k net of salary
already received classified as NE salary.

If no "bonus" is paid to the owner, nearly all the $300k
income will be taxed as NE individual income because their
state allocation is solely based on sales. Every dollar paid
as a bonus and classified as TX salary will save the NE tax
by reducing net taxable income as well as a TX franchise tax
of 4%.

Which state, if any, can dictate that any bonus paid by this
TX company to the owner be classified in a way that puts
more tax dollars in its coffers? What is the best source for
research of this kind of question? Can the company pay the
owner a bonus of say #200k classified all as TX? If not, why
not...ie, where is the citation?

Mike

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >