Hello all,

Your help is much appreciated.

I am the owner and sole W-2 employee of my S-corp. My S-corp has contracted with a client to provide my services. For the last couple of years, the client has paid the S-corp via 1099-MISC and my S-corp has paid me W-2 wages.

But now, the client wants to hire me directly as a W-2 employee and cut out the S-corp completely. The client wants to do this for the same amount of money that they were paying to the S-corp before (ie., my new W-2 salary = old S-corp 1099-MISC).

Now my questions:
1. Is this legal?
2. I think this will be a disadvantage to me because I can no longer deduct my expenses (via the S-corp)? Should the client pay more (or provide more benefits such as health insurance, 401K matching, etc..) to make up for my loss?
3. My S-corp will have to be dissolved because it will no longer be needed?
4. Are there any advantages at all in going the employee route with the same payment as before? Seems like all the advantages are going to the client and none to me?

I would like to turn down this change and keep running the same way I have been. What are your recommendations?

Thanks.

“I am the owner and sole W-2 employee of my S-corp. My S-corp has contracted with a client to provide my services. For the last couple of years, the client has paid the S-corp via 1099-MISC and my S-corp has paid me W-2 wages.”------> Actually, according to the IRS's 1099-Misc requirements. a 1099-Misc is not required to be issued to your S corp; the IRS does not require a 1099 for a corporation. But If they want to, they can and there is no law against that.You , as a sh, can’t take a 1099. It is assumed by the IRS that no one works for free, and so the IRS has said over and over again that officers of the corporation must receive wages reported on line 7on W2. As an owner-employee of the S-Corporation, you must pay yourself a salary, and pay payroll taxes on your salary, even if the business is losing money. You don't have to pay yourself a high salary, but it must be a "reasonable amount" according to the IRS. The wage is subject to FICA taxes.As lomg as you receive a 1099, then you need to file SchC/sch SE as long as the amount on Sch SE line 4 is $400 or exceeds $400 , youmust pay self employment tax that you, as an S corp, doesn’t need to pay to the IRS.S corp doesn’t need to file Sch C/Sch SE and is nt subject to SECA tax.

“But now, the client wants to hire me directly as a W-2 employee and cut out the S-corp completely. The client wants to do this for the same amount of money that they were paying to the S-corp before (ie., my new W-2 salary = old S-corp 1099-MISC).1. Is this legal?”----->I guess it is up to the client;it is legal to hire you as his/her EE. However, it is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors.
“2. I think this will be a disadvantage to me because I can no longer deduct my expenses (via the S-corp)?”-----> Not really. Generally, your ER must withhold income taxes, withhold and pay fed/state/ Social Security and Medicare taxes, and pay unemployment tax on wages paid to you,an EE. On the contrary, your ER does not generally have to withhold or pay any taxes on payments to your S corp as an IC.In general, ERs may treat their EEs as independent contractors to avoid tax liability. An ER can be liable for the acts of an EE as if the ER did the act itself and that is not the case with an independent contractor generally. An IC has many more tax considerations than a person who is merely an EE.Even if you, as an EE, can no longer deduct your biz expenses on 1120S, you do not need to file 1120S but you simply need to file only 1040.Its net effect is not that large as long as your biz net income, NOT gross profit of the Biz, is not much more than your net take home pay that you receive as an EE.
“Should the client pay more (or provide more benefits such as health insurance, 401K matching, etc..) to make up for my loss?”----->I guess not as described previously;perhaps you may receive EE benefits from the ER like health and disability insurance and you do not need to pay your own taxes,i.e, FICA tax by you and S corp or no S copr tax to the state in some states,i.e., NYS or etc or no CG tax when distribution exceeds your basis in the S corp etc. The annual tax for S corpos is the greater of 1.5% of the corporation's net income or $800 in CA state.
“3. My S-corp will have to be dissolved because it will no longer be needed?”----> I gues s so; however, it is up to you UNLESS the S corp is active. The corporation is inactive but you have not filed the tax returns due. Clearly, you are required to file a tax return or at least file an inactive return, in case of NJ. Leaving it active simply means that you are incurring a minimum tax liability every year!You need to pay the minimum state corporation tax,i.e., NJ/NYS, along with interest and penalties that may be due!
“4. Are there any advantages at all in going the employee route with the same payment as before? Seems like all the advantages are going to the client and none to me?”--->I don’t think so UNLESS your net biz income is much more than your net take home salary.

“I would like to turn down this change and keep running the same way I have been. What are your recommendations?”-----> I don't think there's an easy answer and given taxes are part of it, it will depend on your business taxation/fin situation . And in many cases, NO UNEMPLOYMENT insurance is paid by your ER if you are a S corp contractor. So if you lose your job you will be out of luck. Employers often have benefit packages that you would not otherwise be able to afford or deduct. The tax-deductible benefits reduce your Box 1 gross wages, lowering the amount of wages you report on your tax return. You can deduct health insurance and retirement plan contributions as an S corp independent contractor on your 1040, although you must do so on your tax return at year-end, unlike regular W-2 EEs who automatically make their deductions through payroll throughout the year. Because you deduct these benefits at year-end on your tax return, you keep less money in your pocket from benefits throughout the year. The IRS requires independent contractors pay 90 percent of the current year tax liability, or 100 percent of the prior year’s tax liability for earnings less than $150,000, in the form of estimated quarterly payments on your 1040ES. As an employee, you have all your tax matters handled with the exception of income tax return preparation. However, you possess limited ability to do any tax planning for your income. Conversely, as an independent contractor receiving a 1099, you are responsible for all your tax matters. Your employment related tax is higher, but you maintain the ability to reduce your gross income through tax deductions, such as home office expense, auto expense, wage expense and professional fees. If you are unsure about your specific situation regarding EE or an S corp IC, you need to contact a local tax practitioner for professional help on the issue.