I have an S Corporation. I have paid myself with 1099 contract labor. I think this may be incorrect. When filing the tax return, can I put the 1099 amount as compensation of officers, or does that have to be from a W-2 for. Do I have to refile 941s and pay myself as employee or can I get around this some way ? Also, I could file as C corp if this would help, because I have not filed return yet as S corp.

ANSWER

The BIDaWIZ Team's Answer:

It would not be appropriate to issue a 1099 to the shareholder of an S Corporation for services rendered. Rather, issuing a W-2 and withholding the necessary payroll taxes would be the recommended treatment in this case and as per IRS guidance. The shareholder should also be issued a K-1. A S Corporation is allowed to withdraw distributions that aren't subject to self-employment and payroll taxes, but they still have to pay themselves a reasonable salary. As for a S Corp vs. a C Corp, generally speaking, a S Corporation provides significantly more tax benefits to the shareholder than a C Corporation. Companies that elect C Corporation status do so because they have to and because of their future growth prospects. Please note that as a S Corporation owner, you would need to amend the Form 941s as well as issue a W-2 & K-1 for the end of the year reporting. There's really no other way around this situation. The only possibility was that you initially took out a loan from the S Corporation, but you don't have the loan documents to support that scenario and your withdrawals are likely haphazard. It would be an immediate IRS red flag as you need to pay yourself a reasonable salary as an S Corporation owner that performs services.