it seems to me that this is compensation that should have been reported on a w-2
I would say if it was paid before he left the company it definitely should have been reported on a w-2.
even if paid after he left I think it should have gone on a w-2
assuming I'm right there can be significant penalties levied against the the Corp and even the responsible person for the corp for failure to file and pay over whatever withholding taxes there should have been.
i would suggest waiting to see what others might respond.
generally, the IRS position is that a shareholder can not be an independent contractor for the company- the 1099 route.
there is no way to specially allocate income to him in an S-Corp. as matter of fact, he should be getting a k-1 for the pro-rata portion of earnings or loss of the corp for the period he held the stock.
