Discussion:Employed or self employed?
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Discussion Forum Index --> Tax Questions --> Employed or self employed?
| 4 January 2007 | |
| This is probably a stupid question, but I'm having a hard time finding a definitive explanation. How is this determination made (for example for the purpose of a SEP)? If someone is the 100% owner of an S corp and pays themself a wage are they employed or self employed? | |
| January 4, 2007 | |
| Self employed means filing a Sch. C, sole proprietor. An S corp owner is both an owner and an employee (normally) but is not self employed. The SEP is based on his wage from the corp. | |
| 4 January 2007 | |
| Thanks JR1. So just to be clear, a 100% owner of an LLC (who files a SMLLC on sched C) is self employed but if more than one owner and on a 1065 is an employee? Thanks again. | |
| 4 January 2007 | |
| Happy New Year. What about a sole S Corp owner who earns a salary from the S Corporation but also does contract work for other Corporations which issue the sole shareholder a W-2 at year end? Does that W-2 income earned as a contractor become part of the S Corp return or does that W-2 income get included as part of the 1040 wages? Perhaps the way around this is to ensure that the Corporation hiring the contractor understands that a Corporation is actually hired to do the work rather than an individual (who happens to be the only person on the S Corp.) | |
Death&Taxes (talk|edits) said: | 4 January 2007 |
| Line 7, Form 1040. He should only do this work for the S Corp for now if his S Corp wages are high enough, his S Corp will be paying too much FICA on any total wages over the limit. | |
| 4 January 2007 | |
| I don't understand your comment. Could you please explain a bit more? | |
| January 4, 2007 | |
| JDcpa - Did you mean to say 1120S (instead of 1065) in your second question? JR is correct, but you changed the question from an S Corp employee to a partner in a partnership. Anyway, the answer to your original question is he is employed (an employee of the S Corp). | |
| 4 January 2007 | |
| Deback- I changed the question to make sure I understand correctly. I now understand that a 100% owner of an S corp is an employee and not self employed, but with the explanation being that self employed is determined by schedule C filing, I was just curious if a single member LLC (which to me is comparable to a 100% owner of an S corp) would then be considered self employed. | |
| January 4, 2007 | |
| Yep. It's not comparable to an S corp owner. He's a Sch. C filer. (And yes, I suppose that technically, partners in an LLC would be considered self employed. Maybe I should say instead of a Sch. C filer, a Sch. SE filer. . .Farmers. . . | |
| 4 January 2007 | |
| Welllll, not exactly. An S corp shareholder is both an employee and self-employed. For payroll tax purposes (and SEP purposes), the S corp shareholder is an employee. For fringe benefit purposes, the S corp shareholder is treated like a partner, hence is treated as self-employed. It is true that anyone filing a Schedule C will be considered self-employed, but it is also true that a general partner in a partnership will most times be treated as self-employed, and an active member of a multi-member LLC will also be treated as self-employed.
And from a practical point of view, although my practice is from within an S corp, I consider myself as self-employed, and I feel self-employed, and most outsiders would look at me and consider me self-employed. | |
| 4 January 2007 | |
| JR: Maybe this list will help summarize the possibilities:0
Sole prop: Self-employed (Sch. C)
Owner(s) of LLC electing corp. or S corp. tax treatment: employee | |
| January 4, 2007 | |
| Now don't go confusing the poor fella! Yeah, we all consider ourselves self employed, but that's different from the tax definition. . . | |
| 4 January 2007 | |
| D&T: Are you saying that if he is the S Corp S/H that he should not engage in any W-2 work until after the wages limit is reached by the salaries paid to the S/H from the S Corp or vice versa? I imagine it would tough to time these jobs throughout the year so that you would avoid the overpayment of FICA. I don't think i was too clear on your answer. Could you please explain it again? | |
Death&Taxes (talk|edits) said: | 4 January 2007 |
| Chase: What I am saying is that suppose your S Corp man takes a salary of $100,000, and then also receives three W-2s totaling $30,000. There would be excess Social Security from the employee standpoint and he would get credit on his 1040, but his S Corp will have paid its matching share on that same 30K and cannot get this back. That is why he must instruct all payers to pay his S Corp. | |
| 4 January 2007 | |
| D&T: I think the S corp. should pay reasonable compensation to the shareholder/employee for their contribution of effort to the S corp. regardless of any other income earned by the employee. An employer must not take into account wages subject to FICA earned by an employee in other employment. I also think the FICA-avoidance strategy you describe carries with it the same baggage as when an S corp. pays a shareholder/employee a trivial or no compensation. -- Larry Hess, CPA, Albuquerque, NM - Talk to me | |
| January 4, 2007 | |
| D&T isn't suggesting a dodge, tho', merely using the corp as it was intended. If all service providors pay the corp and the corp pays the reasonable salary, there's no lost FICA tax going into the pot... | |
| 4 January 2007 | |
| JR: I think it's the employer's share of FICA that's at issue. -- Larry Hess, CPA, Albuquerque, NM - Talk to me | |
Death&Taxes (talk|edits) said: | 4 January 2007 |
Larry: you are misreading me and putting words in my mouth that aren't there; I am simply telling Chase that if her client can arrange matters, all work should be done through his corporation, one reason being Social Security cost. And actually he would be saving the other employers their share of Social Security too. Nowhere do I say 'cut your payroll so you can avoid Social Security' but rather I am saying 'as things stand, your corporation may be paying Social Security it cannot recover.'
Obviously there is more to this than a potential 6.2% being paid twice. Only Chase or her client can tell us but it could be one of the other payers covers him for health insurance, or gives him a matching 401K. There is also the case of screenwriters. MGM, Warners and others in whatever name they are operating pay via W-2, even on later royalties on scripts. Why I don't know but I suspect it has something to do with control of the writer. | |
| 4 January 2007 | |
| Many employers, particularly larger ones, are very nervous about the independent contractor/employee issue. Therefore, the employer uses an employment agency such as PRO or others, and the individual (who has his own S Corp) is now the employee of the employment agency even if on a contract basis. It's screwy but that's my understanding. Ideally, he'd get those contracts on his own (and get more $$$ because you cut out the middle man) but that seems to be the wave at this time. | |
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