in other words, no W-2 was issued nor [payroll tax returns filed which could lead to a host of penalties. reporting on schedule C could lead to another host of penalties. not only could the IRS come after you and the corp but also the State for failure to file and pay Unemployment compensation taxes.
Breaking the Law! – Revenue Ruling 74-44; IRC §3121(d) specifically states than an officer of a corporation is considered an employee “subject to payroll taxes on remuneration paid to services performed.” Also, the Tax Court Case Sean LTD. versus Commissioner (Summary Opinion 2013-62) states that a salary cannot be in the form of shareholder distributions or 1099-MISC payments.
note that line 7 of return is for officer comp so its likely the IRS will be looking for a w-2
also consider the IRS has at least years to catch this and penalties and interest are accruing every day. repeated failure to properly report could give the irs 6 years. if it catches this it may audit those returns and if you don't have support for any expense it audits, it can get thrown out.
