Although I have a schedule C business, I paid myself a W-2 salary. How do I determine the correct amount of the qualified business income deduction?

[SweetieJean]

Please confirm that you have a Schedule C business, not a C Corp (which is different).

[Anonymous · Accepted solution]

 a sole proprietor can not pay himself a salary so did you really file a W-2 and 941's. pay withholding, medicare and fica taxes?   if so, you have a mess on your hands.  your salary would not be deductible on schedule C nor reportable as wages on the 1040. Seek professional help to fix this.  There are many issues besides the QBI deduction. I advise not  filing your 1040 until this is cleaned up.     .

   Sole proprietors of businesses are not eligible to receive salaries, as it is prohibited by law. These small business owners thus do not receive W-2 forms. They can use the money in the business to pay personal expenses without adverse tax consequences. (not allowed to deduct personal expenses paid against business income.  

[Carl]

You are in an absolute nightmare now, unfortunately. The IRS considers a SCH C business, be it a sole proprietorship or single member LLC, to be a disregarded entity. Under no circumstances and with no exceptions does the owner of such a business issue themselves a tax reporting document of any type. There are no exceptions. You will need to seek professional help to fix this. If your state taxes personal income you've got another nightmare inside the first nightmare. Seek professional help yesterday, if not sooner.

[ps12]

Would you please point me to the law regarding this requirement? I can't find it.

Thank you.

[Anastasia-CPA]

Where can I find the IRS source on this rule ? I need to send it to my client. Thanks !

[ZoltanB45]

Sole proprietors, Single member LLC's and Partnerships do not issue W-2's to the owner.  It is just a known fact. I would not go crazy if you did it this one time. Record the payroll expense, but going forward, do not pay yourself a salary. Take a draw.

[SirMatthew]

The regulation that covers this is 26 USC §1402.   https://www.law.cornell.edu/uscode/text/26/1402

[Mike9241]

you might also look at code section 3121(d)(2).  it's under common law that a sole proprietor is not his own employee. In my opinion, since a sole proprietor is not an employee, the wages paid to himself would not be deductible under IRC 162 or any other code section. therefore, he would owe SE tax on his entire net SE income and would need to file amended payroll tax returns to get back the federal payroll taxes. if he paid state payroll taxes that too would likely require amended returns.  if he has filed past years' returns and deducted the salary to himself, those too would need to be amended.     

[FunpoppyJ]

Hi, can someone start a personal care attendant (PCA) business which funds get paid a wage by medicaid/medicare and file a schedule C? If I missed a detail let me know, ty 

[Mike9241]

no. a sole proprietor cannot not get a wage (w-2) from that business. nor would an LLC change this. you would have to incorporate. see a tax pro to look over your situation to see if incorporating makes sense.  

[Hal_Al]

No. You cannot classify wages paid by medicaid/medicare as schedule C (self employed) income. 

In fact, most such wages are excludable from income (but are still eligible for the Earned Income Credit).

References and details on how to report:

https://www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-From-Income

https://ttlc.intuit.com/turbotax-support/en-us/help-article/form-w-2/qualified-medicaid-waiver-payme... 

https://www.publicpartnerships.com/media/bylb5fvj/difficulty-of-care.pdf

https://www.irs.gov/businesses/small-businesses-self-employed/family-caregivers-and-self-employment-...

[TomD8]

@FunpoppyJ --

A health care provider receiving a 1099-NEC from his/her Medicare contractor would report the income on a Schedule C.

Payments from Medicare/Medicaid to a healthcare provider are not wages.  The healthcare provider is not an employee of Medicare/Medicaid.