Where to Enter Commission for Shareholder

[convmarketing]

Hello,

I am working on filing for an S-Corp. The business did not make enough money to pay wages to the owners (i.e. none of the owners took a salary, and there weren't any distributions). One owner gave up his share of the company, but was paid a commission for a customer he brought to the company during the year. What is the correct way to report his sales commission? Other income on the K1, or also give him a 1099? Something else?

Thank you.

[Mike9241]

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.

[convmarketing]

Thanks for the input. He is getting a K1 for the weighted portion of when he was a shareholder. The commission was earned while he wasn't a shareholder, if that helps.

[DianeW777]

The IRS give guidance on this specific topic. Pay specific attention to the S/C Corporation rules.  Paying Yourself

It sounds more like a buy out or sale of his share of the S corporation on his end and a purchase of his share by the S corporation. If this is the case it would be an equity transaction and not commissions.  However, you indicated this was paid after he had relinquished his ownership. If the latter is true and you don't have documentation before he relinquished his share of the company, indicating he would be paid a commission, then the question still remains about whether he is an employee or an independent contractor.

I would suggest you have a professional prepare the return for 2021 to avoid any future penalties as indicated by @Mike9241.