taxation on bonuses?

Question

client has a C-corp and he is 65% shareholder. He got 80K on w-2 from corp and 265K withdrawal as bonus. So corp expense the bonus and now he need to report the 265k bonus on his 1040. He has some expenses that he can offset againt his bonuses. Can we file an schedule C and show the bonus as an income and deduct the expenses or not. Thanks

Answer 1

If the expenses were related to earning the bonuses yes, but if they had nothing to do with the bonus, then no. The good thing would be is that he SE (Self-Employment) tax that he would have to pay would be limited. If you're talking about 2006 the social security limit was $94,200, so he'd have to pay the full SE tax (15.3%) on $14,200 of his net Schedule C profit, the rest of it would be taxed at 2.9%. For 2007, the social security limit is $97,500, so he'd have to pay the full SE tax on $17,500 of his net schedule C profit, and the rest would be taxed at 2.9%.

He could also have the $265,000 paid to him as a dividend, but then the C-corp wouldn't get any deduction for that, but that would be taxed at a preferential rate to the client (15%).

Answer 2

The bonus goes on the W-2. FITW at 25% and appropriate SS and Medicare taxes should have been withheld as well as any state taxes.

This is NOT a Schedule C issue. If the shareholder sold stock back to the company, that would be handled as any stock sale and taxed as capital gains.

Any deductible employee business expenses are handled on Form 2106 and flow to Schedule A subject to the standard 2% limitation.

Answer 3

Allowable expenses that have not been reimbursed by the company can be deducted to reduce the taxable income.