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Wednesday, August 27, 2014

Taxes: Reporting Business Income (when you are paid instead of the business)

I have a 1099 in my name, but the money was really for the business...

This is a common problem we see in tax filings of small businesses -- especially those involved with the Federal Government or consulting work. Frequently, a hiring company will refuse to pay corporation-to-corporation, and instead insists on paying in the name of the principal. Said a different way -- your business isn't paid for the work you've done -- you are paid directly.

This presents a serious problem. First, by paying you directly, it most likely changes the taxable bracket in which you fall. Secondly, by paying you directly, you are unable to claim business deductions from the amount - before it becomes income via a K1 or other vehicle.

The fix for this is not too complicated, but does take a little planning. First, you must report your income. The key is where. In this case, you must file a 1120S (1120S = corporate filing, sub-chapter S election -- if you need help understanding this, you need to contact us to discuss. You must elect sub-s status, it is not automatic. Technically, this applies to C corporations, also, however, handling partnerships may be a little different -- so chat with us first). The 1120S needs to reflect the income that should have been attributed to the company, but was paid to you directly (the principal). To the penny, this must be accurate.

Then, on your 1040, include the money from the 1099 as self-employed business income. You will complete Schedule C, indicating a business. Use the EIN from the 1120S. Show all income paid on the 1099 or W2, and deduct the entire amount. Under explanation, indicate that this money was accounted for in the 1120S that was filed for the corporation. You should, therefore, show the income and a 100% right off on your 1040, and an exact matching entry on the 1120S (income). This properly removes the amount from your 1040 personal income, and places it on the 1120S. Once you have completed the deductions on the 1120S, the remainder income will then come over as a K1 -- so you'll see at least part of the income again in the form of dividend income (the proper method for receiving any overage from the corporation).

Do you have a tax question? Give us a call at 703-402-2723 or 1-800-579-9864. Your initial consult is free, and we're happy to discuss tax matters in a way you can understand.

Hanover Law, PC
Offices in Fairfax, VA and Washington, DC Lili O'connell, Esq.
Abby Archer, Esq.
888 16th St., NW Ste 800
Washington, DC 20006
2751 Prosperity Ave, Ste 580
Fairfax, VA 22031
Sean R. Hanover, Esq.
Stephen Salwierak, Esq.
1-800-579-9864 Charles Hatley, Esq.

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