We were passing a 1065 k1 (lawyer) through an 1120s to eliminate self employment tax and that k1 would now pass through a 1040.
The lawyer’s management company (1120s) didn’t pay the officer (the lawyer) a reasonable salary so the partner in my firm told me to accrue $150k in wages and the 1120s would pay the shareholder (the lawyer) that amount the following year. I think he didn’t pay himself a reasonable salary bcuz it was a late year election?
So the financials would reflect a salary of $150k, but he didn’t actually pay himself that until the following year lol.
At first I thought it was genius but now I’m wondering is this ok?
I’m just a staff accountant with 2 years of doing s corps now btw
Is this a legit strategy? Or is the partner insane?
byu/CoolProfessor449 intax
Posted by CoolProfessor449
3 Comments
How can an S-Corp receive a salary?
Look up Fleischer V Commissioner, the IRS has won in tax court when people try to illegitimately shift individual income to an S Corp to avoid SE tax
The structure is not particularly uncommon (but many more are not structured this way) in law firms – a P.C. taxed as an S-corp is the actual partner in a LLP (or other state law entity taxed as a partnership) and the individual lawyer is the sole shareholder and an employee of the the P.C. Look at the lawyers listed on Kirkland & Ellis’s website – many of the partners are listed as John A. Doe, P.C., not John Doe. It is not permitted in all states (the rules governing ownership of law firms vary), but that structure itself doesn’t raise a red flag. If your lawyer is the state law partner in the tax partnership, that’s a different story and it would be assignment of income to the S-corp that isn’t going to pass the smell test – the partnership income is going to be all SE income to the individual.