Officer or employee ??

Question

I incorporated and not sure if I should file my wages as "Componsation of officers" (line 12 in the 2006 1120 form)
or as "Salaries and wages" (line 13)
I do file 1040 as well for myself.
thank you.

Does it actually make a different ?
what is it ?

Answer 1

You're an officer. That's where it goes. Salaries and wages is for non-officer employees.

The reason is that the law requires officers to be paid a reasonable salary based upon their duties and value to the organization. Without that law officers, who tend to be significant shareholders especially in closely held corporations, would declare dividends that are not subject to Social Security taxes or payroll taxes to avoid paying those taxes. The entry is made separately as a quick "sanity check" that officers are being properly compensated wtih wages or salary subject to Social Security and payroll taxes.

Answer 2

At the bottom line, It makes no difference to total tax liability where you report your pay, as long as you are claiming a reasonable amount of compensation (which is subject to payroll tax). Whether it's "officer compensation" or "employee compensation," both are subject to employment tax and both result in a W2. The tax liability is the same. What you can't do *in either case* is try to structure your pay so that you escape or pay unreasonably low payroll tax on your compensation. The IRS looks at S-corporations particularly hard because these are pass-through entities. A lot of S-corps have one or a few shareholders that are actually generating the corporate revenue themselves, but try to get away with low or no payroll taxes by paying low or no wages and characterizing the pass through amount as a "distribution," (not subject to payroll tax). That will land you in hot water. For example, if your corporation engages in the electrician business and you work as an electrician, but pay yourself minimum wage and try to take most of your pay as a distribution, the IRS will call you on that since electricians typically get much more than minimum wage. They would view that as a clear attempt to escape payroll tax liability, and slap you with additional tax, penalties and interest. You need some backup to establish what is reasonable compensation for the services you provide to the Corporation, whether those services are as an officer or as an employee in the trenches that is generating the income stream for the Corporation. The IRS is unlikely to care where you choose to report your salary as long as you've accounted for the amounts reasonably. Their primary objective is to ensure that you're not skipping out on payroll tax.