Income Tax Question

[rpadula]

Yeah, I know it's past April 15th, but I'm trying to help a friend who I think is being BS'ed in a big way.

Said friend is a "starving artist" creative type. Income is about $10-$15k per year, and he has had tax preparer #1 do his returns for the past few years with the income going on Schedule C (sole proprietor) with some very straight-and-narrow deductions. This is his only income.

This past April, friend gets advice from another friend who says "use my tax guy" (#2) and save $$. Preparer #2 filed an extension at the last minute w/o my friend's agreement (red flag #1) and I said send me copies before you do anything! I finally got them this weekend -- all income is now listed on Schedule E, line 28, as being from an S-corp, so self-employment tax has supposedly vanished! Friend isn't incorporated, and this doesn't seem to pass the smell test to me.

I know I can't get specific advice, but do any of the adults here have a better opinion than my nose?

Thanks,
Rich

 

[wsuffa]

I am pretty certain that self-employment tax - or SS tax - is due for anything construed as personal income.

But I'm not a tax expert.

 

[SCCutler]

It is very difficult to have income from an S-Corp, when there is no S-Corp.

Not a tax lawyer, and I have no idea what Holiday Inn Express has to do with it, but this sounds a lot like Tax Fraud (felony) to me.

 

[gkainz]

There is no self employment tax in an S-Corp (I have one). However, like noted above, if there is no S-Corp, then it WILL be caught. Election of S-Corp treatment was a request via official form to the IRS back 10+ years ago when I incorporated.

 

[rpadula]

Thanks for the responses. I'll have to dig a little more. Dude #2 did list a company name and EIN on Schedule E. Heck if I know which cavity they came from.

Greg, I realize there is no self-employment tax with an S corp, but how would one get the money out of the corp. to the individual without Soc Sec tax? I've heard of crazy #%*$ (like paying it all out as dividends instead of income), but most of it is shot down by the IRS in one way or another.

Does an S-corp even make sense for one individual making so little money?


Thanks,
-Rich

 

[SCCutler]

Disregarding the issue of claiming the business is an S-Corp when it is not, if the fellow had an S-Corp and paid himself solely as pass-through, with no withholding, the IRS could and would recharacterize as wages, then assess interest and penalties.

 

[KennyFlys]

I've been doing my own taxes for twenty years with the last twelve being self-employed. I've escaped self-employment tax (read twice normal FICA & Medicare) all but twice while self-employed. The rest of the time, I had enough mileage and other write-offs to make it a none-issue. I haven't had any earned income but SE tax is hard to avoid without the write-offs.

While an S-corp might escape them in the interim, the idea is revenue after expenses are passed on to the owner of the S-corp. That owner would still be subject to FICA & Medicare. What I don't know is if it's as an employee or as self-employed (Once v. Twice paid).

Regardless, if this dude is not incorporated in the slightest, C, S, LLC, whatever... to state so and file accordingly is indeed fraud.

I had to deal with them on $13k of under-reporting that grew to over $30k after penalties and interest. Fortunately, they kept it civil. I'd be up a creek had they wanted to pursue criminal matters. There was nothing criminal about it but it's next to impossible to beat the IRS once they decide to push an issue. Your friend is beyond help if that gets caught once he signs and submits the forms.

Tell him to stick with a 1040 and Schedule C.

Beyond that, I'd love to know the trick to surviving on $10-15k a year without being homeless... or... ?

 

[Obi Heed Kenobi]

There was nothing criminal about it but it's next to impossible to beat the IRS once they decide to push an issue....

Rare, exceedingly rare, but not impossible...every once in a while the IRS tries some shenanigans like attempting to make a few hundred 85 year old farmers' widows personally drive the tractors, rope the cows, or round up the horses in order to claim a family farm tax rate reduction on an inheritance after their husbands' deaths.

And every once in a while, someone calls them on it, and gets the last laugh when the federal appellate bench calls them on it, too.

Unfortunately, the IRS is in a position to beat up on a lot of people, even over honest mistakes, misinterpretations, or misunderstandings.

 

[gkainz]

Greg, I realize there is no self-employment tax with an S corp, but how would one get the money out of the corp. to the individual without Soc Sec tax? I've heard of crazy #%*$ (like paying it all out as dividends instead of income), but most of it is shot down by the IRS in one way or another.

The S-Corp can pay out dividends, legitimate business expenses, etc and significantly reduce taxable income, but the IRS does insist on a reasonable salary paid, including required payroll related taxes. I have no idea of their criteria for "reasonable salary" but speculation leads me to believe "compared to industry standards" might be a guideline.

Does an S-corp even make sense for one individual making so little money?

I have no idea. I incorporated over 10 years ago and S-Corp made the most sense for me. I've heard that LLC and LLPs are the more common method of incorporation for small business now.

 

[Ken Ibold]

I've been self-employed for 10 years, and had S corps and LLCs involved in owning airplanes, so the infrastructure for what you describe was in place. I've had three different tax guys in that period. But I've yet to find a way around Sched C and self-employment tax that would pass the smell test in an audit.