LLC filing as s corp with no officers

[Amy S]

We are a 2 member LLC filing as an S-Corp.  As an LLC we only have members and not officers.  We pay ourselves a salary and issue W2s for that salary. We had a very good year and had over $500,000 of receipts.  For the first time TT is making me fill out a special form for compensation of officers.   I'm not sure if I should complete this form because we don't actually have officers.  TT is very insistent that I must complete it. Previously I had been reporting our salaries under wages for >2% shareholders.  When you look at the 5 year reporting history it looks very different this year. I understand that this does not make a difference to the bottom line but I'd like to file consistently and correctly and want to make sure I am reporting this in the correct spot.  Thanks.

[DavidS127]

Even if you have no designated officers and 1125-E is only required if you deduct officer compensation, you may need to the Form 1125-E and report no officer compensation to prevent an error in the TurboTax return.

Also, I highly recommend that you read the "Line 7. compensation of Officers and Line 8. Salaries and Wages" section of the Instructions for Fo....  Note that your fringe benefits, including health insurance premiums, are included on Line 8 and reported on your W-2 if you are a >2% shareholder, regardless of whether you are an officer.

[Edited 02/28/2020|10:15am PST]
@AmyS
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[tagteam]

I agree generally with @DavidS127 except the fact is that a corporation determines who is an officer under the laws of the state where it is incorporated and it is unlikely a state would consider a member of an LLC a corporate officer.

https://ttlc.intuit.com/community/refund-status/help/when-will-i-get-my-irs-tax-refund/00/25589

Regardless, I would suggest completing Form 1125-E listing members (and their ownership percentages) for the purposes of full disclosure and, further, I am not sure how you would be able to get past the error check in TurboTax Business without completing the form.

[ericinmaryland]

Turbo tax does not understand: LLC who has elected SCORP tax status.

In this scenario there are no officers, only Managing Member/owners. This approach also does not mean you are a corporation. You are still an LLC.

TT2020 does ask that shareholders be identified and this makes sense to me as LLC ownership could be 1 or 2 persons (husband or Husband/wife) if SCORP was elected. I presume this fills form mentioned.

The issue I feel is the insistence of TT to refer to Officers because it does not recognize LLC using SCORP. This leads to confusion and an issue during filing when the program asks if there was officer compensation.

Using the scenario of this thread, the answer I believe is no. Managing Members where compensated via W2 and then take a distribution share of remaining profit to those people. In all cases, the recipient of the distribution pays the taxes.

That question during filing stage I suppose is the way the IRS ensures the Managing member had W2, but it is so poorly written that it becomes confusing. Plus there is no instructions for this question.

So to the 2 experts....please clarify.

[ericinmaryland]

Let me add that the comment "Deduct Officer Compensation" I presume to mean, deducting the w2 expense for the >2% owner(s).

Again, these are not officers so responses with regard to LLC filing as SCORP need to be clear. Its what TT is supposed to understand.

So when there is w2 and the remaining profit is distributed....is this "Officer Compensation"?

[DawnC]

The S corporation status can be granted to a limited liability company or corporation.  LLCs are commonly formed by owners that are termed "managers" or "managing directors" instead of officers.

Deducting officer compensation would entail deducting the W-2 expense of the "managing directors" or >2% shareholders.

The amounts of the W-2 are compensation, not the distributions.  Compensation is subject to employment taxes (including Federal Insurance Contributions Act taxes) and distributions to shareholders are not.

@ericinmaryland

[ericinmaryland]

I’m not sure why nobody seems to be able to understand my question. If you are using TurboTax for business and You are Filing your return, a question pops up related to officer compensation. Why is the question asked during filing and how is it supposed to be answered if you have no officers. Where are the instructions?Where do the answers from those questions appear in the return?

[DawnC]

The answers to those questions go to Form 1125-E; here are the instructions.   As you can see, the word ''officer'' is an IRS term.  For purposes of completing the form, you are the only officer/managing member.  

Certain entities with total receipts of $500,000 or more use Form 1125-E to provide a detailed report of the deduction for compensation of officers.  The IRS wants the details of your S-corp's wage compensation to ensure you have paid yourself a reasonable wage.  The amounts on this form are informational and should reflect the amounts you deducted as salary expense on Line 7 of your Form 1120-S.  

And yes, these amounts are already reflected in your return, but the IRS requires the additional summary form in cases where total receipts total over 500K.  

[ericinmaryland]

I am not arguing that the IRS wants that information...but its already in the return.

I am asking why there is a question during e-Filing related to officer compensation (Y/N) and the a cound of the number of Officers and W2 Employees when it seems the answer is elsewhere. You are simply not understanding what I am referring too and I ask that you create a return then go to e-file to see the screen. If I could embed a screenshot here I would but that is not supported.

[DianeC958]

When you file as an S-Corp the officers ( Managing Members) are required to take a reasonable salary and that amount needs to be reported on Line 7 of your S-Corp return.

If you do not show compensation to S-Corp officers on Line 7 of your 1120S return it can trigger an audit.  

The IRS is constantly increasing reporting requirements to have people be compliant.

[tagteam · Accepted solution]

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@ericinmaryland wrote:

I am asking why there is a question during e-Filing related to officer compensation (Y/N) and the a cound of the number of Officers and W2 Employees when it seems the answer is elsewhere. 

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I believe what you are referring to is nothing more than a control question, which the IRS requires for electronic filing; it is as simple as that.

[ericinmaryland]

This is a very late response to an issue that as far as I can tail has not yet been resolved. If this is an IRS required form, it’s your job into it to clarify that form so that users understand exactly what they are being asked. One of the areas that you fail to address In your product is the fact that an LLC can elect S Corp. tax status LLCs have no officers.Therefore it is your job to ensure that users understand what to do on that page when they are filing a S corporate return as an LLC.

A different member finally clarified for me exactly how to respond to that page. I still submit that the information needed to respond to that page is already elsewhere in the return and that your product should fill it in automatically.