50/50% S Corp With Spouse - W2 Wages vs Distributions

fgt · ‎March 11, 2020

Hello,

I have an LLC where the ownership is split 50-50 between my wife and I. She is not active in the business in any way, it was just originally set up this way. Our business is set up in Ohio and is not a community property state if that matters.

I am making the S Corp. election this year and have a few questions about the necessity to pay W-2 wages to all shareholders.

If my wife and I file a joint return, is it acceptable for me to be the only one receiving a reasonable W-2 wage, but both of us receive 50% of the K-1 income? I would being paying the reasonable wage based in the total 100% income.

Or is it required in this situation where she's not receiving w2 income, that we move 100% of ownership to me?

If we can keep the 50-50 split, what would I mark on the return for her K-1, for material participation and passive vs active? Any other special things to do to the return?

Thanks for your time.

john-pero · ‎March 11, 2020

"necessity to pay W-2 wages to all" working shareholders. is how I interpret it but a quick call to your tax CPA should be in order. No LLC electing S status should attempt to self file - too many what-ifs

You only have to pay the reasonable wage to shareholders that work for the business - in the case of a single shareholder they are presumed to work for the company. In your case it is only you, despite your wife owning 50%. LLC is a state designation. To properly report the 50/50 you would have been issuing two K-1s in the past. That does not change, just the 1065 behind the scenes becomes a 1065S

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john-pero · ‎March 11, 2020

"necessity to pay W-2 wages to all" working shareholders. is how I interpret it but a quick call to your tax CPA should be in order. No LLC electing S status should attempt to self file - too many what-ifs

You only have to pay the reasonable wage to shareholders that work for the business - in the case of a single shareholder they are presumed to work for the company. In your case it is only you, despite your wife owning 50%. LLC is a state designation. To properly report the 50/50 you would have been issuing two K-1s in the past. That does not change, just the 1065 behind the scenes becomes a 1065S

fgt · ‎March 11, 2020

Thanks for taking the time to answer my question. It's very much appreciated!

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50/50% S Corp With Spouse - W2 Wages vs Distributions