Assigning 1099 Income from personal to S-Corp

[Jack from Ohio]

We have some Mary Kay directors that are being pressured to incorporate (S-Corp to "save tax") by some of their fellow directors on advice from another tax firm that proclaims that they have the all knowing answer.  Here is the situation:

Mary Kay issues 1099-MISC for all prizes, awards and commissions.  The amount is reported in box 7.  The 1099 is issued to the name of the Director and using her SS#.  Mary Kay will not issue the 1099 to anyone but the Director/consultant.

Said firm states: "Just because Mary Kay says they can't pay your commissions or send the 1099-misc to anyone other than you, doesn't mean that WE can't assign the commissions, sales and any other revenue to a corporation for IRS income tax purposes. We have had incorporated directors for decades. Some have been audited over the years but never for being a corporation, only for reviewing deductions on the tax return." 

The director in this example has been a sole prop for 15 years.  Annual profit of $25K - $50K for the last 10 years or so.  This firm seems to insist that incorporating can save them money by reducing tax.  Our recommendations have always been that with income in that range, the expenses of incorporating, additional tax forms, payroll expense etc. far outweigh any (if any) tax savings after paying a "reasonable" salary to the owner.

My question is:  Can the 1099 income be "assigned" to the S-Corp instead of their personal return.  If so, how would you go about reporting it?

[RitaB]

36 minutes ago, Jack from Ohio said:

We have some Mary Kay directors that are being pressured to incorporate (S-Corp to "save tax") by some of their fellow directors on advice from another tax firm that proclaims that they have the all knowing answer.  Here is the situation:

Mary Kay issues 1099-MISC for all prizes, awards and commissions.  The amount is reported in box 7.  The 1099 is issued to the name of the Director and using her SS#.  Mary Kay will not issue the 1099 to anyone but the Director/consultant....

My question is:  Can the 1099 income be "assigned" to the S-Corp instead of their personal return.  If so, how would you go about reporting it?

You could report the gross on Sch C, then back out the gross on one of the "Other Expenses" lines on p. 2 of Sch C with an explanation to this effect:  "Issuer incorrectly prepared 1099-Misc with recipient SSN.  Income is properly reported on Form 1065 for EIN # blah, blah, blah."

[Jack from Ohio]

1 minute ago, RitaB said:

You'd report the gross on Sch C, then back out the gross on one of the "Other Expenses" lines on p. 2 of Sch C with an explanation to this effect:  "Issuer incorrectly prepared 1099-Misc with recipient SSN.  Income is properly reported on Form 1065 for EIN # blah, blah, blah."

So this is an acceptable practice with the IRS?  Assigning income to the S-Corp by claiming it on Sched C then backing it out?

They will not tell the directors about payroll, reasonable wages, etc.  I just wanted to hear other opinions.

[RitaB]

24 minutes ago, Jack from Ohio said:

So this is an acceptable practice with the IRS?  Assigning income to the S-Corp by claiming it on Sched C then backing it out?

They will not tell the directors about payroll, reasonable wages, etc.  I just wanted to hear other opinions.

I don't know any other way to handle it.  I've never requested a Revenue Ruling or the like, but I've have never had it questioned when I backed out 1099-Misc Box 7 amounts that were really employee reimbursements that belonged on Form 2106, for example.  That doesn't mean it won't be questioned when you do it. 

But you know they'll question it if they don't see it on Sch C gross income.

Let's see what others think. 

[RitaB]

1 hour ago, Jack from Ohio said:

 

Mary Kay issues 1099-MISC for all prizes, awards and commissions.  The amount is reported in box 7.  The 1099 is issued to the name of the Director and using her SS#.  Mary Kay will not issue the 1099 to anyone but the Director/consultant.

Said firm states: "Just because Mary Kay says they can't pay your commissions or send the 1099-misc to anyone other than you, doesn't mean that WE can't assign the commissions, sales and any other revenue to a corporation for IRS income tax purposes. We have had incorporated directors for decades. Some have been audited over the years but never for being a corporation, only for reviewing deductions on the tax return." 

 

You could also ask said firm what they do.

[Jack from Ohio]

41 minutes ago, RitaB said:

You could also ask said firm what they do.

The other firm was asked and they would not say.  "Let us help you incorporate and we will take care of it for you."

[RitaB]

18 minutes ago, Jack from Ohio said:

The other firm was asked and they would not say.  "Let us help you incorporate and we will take care of it for you."

Well, I can't really blame them for that.  I also realize I said Form 1065 instead of 1120S up there.  I can never make a post without a screw up.

[jklcpa]

All of the net profit will ultimately be taxed at the individual's rate whether or not the income is on a Sch C or is in an S corp. The savings would be on the payroll taxes incurred in the S corp vs the entire profit being subjected to the SE tax on the Sch C's profit. Let's say that the net profit is the high end of $50K you mentioned, and if the client did go the S corp route, let's say she pays herself wages of $40K. In this example there is the SE tax savings on the $10K difference that is roughly $1,300, and the closer the W-2 wages are to the net profit of a Sch C, the less the savings.

I did not sleep at a Holiday Inn last night, but this seems like a bad idea to me. It might save that SE tax, but it also puts the client on the IRS radar for that assignment of income, and the client would incur the additional expenses of whatever corporate licensing fees OH imposes plus the additional professional fees of incorporating, accounting and preparing the S corp, W-2s and other payroll filings on top of the individual returns now being prepared.  It does not seem worth it to me to save a net of a few hundred dollars, and the lower the net profit we are talking about, the less the savings. Another factor to consider is what each client's situation is for health insurance. If the person is not covered under a spouse's employer plan and is paying premiums individually, the client will lose the above-the-line deduction for self employed health insurance if shifting the income away from the Sch C. 

I'd have to see a comparison side by side of where there are more savings, including the effect on the state returns. What other savings am I missing in this picture?

 

[SaraEA]

Saving on SE tax is not a forward-thinking plan.  Does your client want to collect SS someday?  The more she makes the higher that monthly benefit will be.  I remember some time ago when SSA started to send everyone a statement of projected earnings each year.  Amazing how many self-employeds suddenly showed huge increases in their profits.  Wonder if looking at those statements that showed they could expect to collect $200 a month had anything to do with it.

[Jack from Ohio]

My post was NOT about the benefits or non-benefits of incorporating.  I have that question all figured out.  

My question was about the ability to assign personal income to the S-Corp.

[DANRVAN]

57 minutes ago, Jack from Ohio said:

My post was NOT about the benefits or non-benefits of incorporating.  I have that question all figured out.  

My question was about the ability to assign personal income to the S-Corp.

It is possible. Case law indicates a two part test must be met:

"A two-part test must be satisfied before the corporation, rather than its service-performing agent or shareholder, will be considered to control the earning of the income. First, the service provider must be the employee of the corporation, whom the corporation has the right to direct and control in some meaningful sense. Second, there must exist between the corporation and the service recipient a contract or similar indicium recognizing the corporation's controlling position. Haag v. Commissioner, 88 T.C. 604, 611 (1987), affd. without published opinion 855 F.2d 855 (8th Cir. 1988); Johnson v. Commissioner, supra at 891; see also Leavell v. Commissioner, 104 T.C. 140, 151-152 (1995)."

[Max W]

I have used the method that Rita describes for many years and have posted it here more than once.

It also works for 1099's that should have been reported in Box 3, but were in Box 7, changing the wording to "......reported on Line 21".

[BHoffman]

I've had a few 1099 forms come in the name and SSN of the SCorp officer.  I entered the income and then a corresponding Other Expense on Sch C with a notation "Nominee income to EIN XX-XXXXXXX" (Scorp EIN). Never a problem.

[RitaB]

6 minutes ago, BHoffman said:

I've had a few 1099 forms come in the name and SSN of the SCorp officer.  I entered the income and then a corresponding Other Expense on Sch C with a notation "Nominee income to EIN XX-XXXXXXX" (Scorp EIN). Never a problem.

Yes, I've had partnerships where one of the partners put his SSN on a W-9 instead of the EIN.  Stuff like that happens.  Put the income on Sch C and back it out.  I for one am not waiting around hoping a 1099 gets corrected.  We dream of that, but we have crap to do.

[Richcpaman]

Jack:

I do as Rita and others on this thread have stated.  Many larger corporations, with many folks working for them as sub-contractors, want you to be personally liable for any act detrimental to the firm, Like Mary Kay.  So they put the $$$ on a 1099, and will not allow you substitute report to a EIN Corporate entity.

Currently, I have one with a 1099-Misc for over $350k a year.  He bought a Corp from a retired broker, and the Broker Dealer refuses to report the income to an EIN entity.

I do not understand why these big Corp's are so stupid about this, and allow you to substitute reporting.

Rich   

 

[DANRVAN]

11 hours ago, BHoffman said:

I've had a few 1099 forms come in the name and SSN of the SCorp officer.  I entered the income and then a corresponding Other Expense on Sch C with a notation "Nominee income to EIN XX-XXXXXXX" (Scorp EIN). Never a problem.

I don't believe the issue here is how to report income from an incorrect 1099, I think we all know how to handle that in order to prevent a CP2000. The question I see is whether the IRS could use the assignment of income doctrine to tax the income at the individual level instead of at the corporate level.

Case law says yes: unless there is a "contract or similar indicium recognizing the corporation's controlling position"  between the corporation and the third party (Mary Kay). That is actually the 2nd step.  The  1st step requires that the shareholder be a valid employee of the corporation and under control of the corporation.

In the 8th circuit case of Haag v Com, Haag was a doctor who was a shareholder and employee of his corporation. Haag prevailed.  First, there was an employment agreement between Haag and the corporation.  Secondly, the court recognized agreements for services were effectively between the corporation and the third parties. In comparison, reference was made to the case of Roubic v Com in which a group of radiologist formed a corporation.  In that case, the agreements with the third parties were held by the individual shareholders, so income was held to be that of  the shareholder's, and not the corporation's.

In another case, Sargent v Com, The 8th circuit court reversed a Tax Court ruling of assignment of income and Sargent prevailed. Sargent was a professional  hockey player who set up a corporation.  He entered into an employment agreement with the corporation. (step 1)  The corporation in turn signed a contract with the team. (step two).

The key is to obtain an employment contract as well as a contract  (or similar indicium)  which recognizes the corporation's controlling position. (See your business attorney for details.)