S corp and out of state 1099

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
EnjoyIt
Posts: 8272
Joined: Sun Dec 29, 2013 7:06 pm

S corp and out of state 1099

Post by EnjoyIt »

Here is the scenario it is an amended example of a real situation.

I have an S Corp located in a state with no state income tax such as Texas. I have an employee (me) who did 1099 consulting work in a state that does have a state income tax such Oklahoma. The S corp was paid for the work and the employee gets a W2 salary from the S-corp.

1) Does the employee need to pay state income tax for Oklahoma?

2) How does the employee reconcile the business expenses needed to do the job as those would be deducted from income and not taxed? For example the S-corp was paid $10k but the employee had travel expenses totaling $2k. How is that reconciled with regards to taxes. Also the S-corp had operational expenses in creating the consulting gig which is very difficult to quantify but does exist.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
User avatar
MP123
Posts: 4084
Joined: Thu Feb 16, 2017 2:32 pm

Re: S corp and out of state 1099

Post by MP123 »

Multi-state corporate taxation can be very complex and depends on the specific tax codes in the states in question.

I'm not familiar with TX or OK, but in general an employee performing work in a state is subject to income tax on the income they receive there. They would probably need to file a non-resident return in OK in the situation you describe. The fact that the W2 employee is also an S-Corp shareholder domiciled in a different state doesn't really make any difference.

But as a passthrough shareholder of the S-Corp you would likely also need to apportion part of the S-Corp's income to OK in addition to the wages that you paid yourself there. So the $10k-$2k in your example would leave $8k of net income to be apportioned to Oklahoma. Note this is income that will be on your K1 as a shareholder, not your W2 as an employee. If the S-Corp had $100k of other income from Texas sources then you wouldn't need to pay Oklahoma for that portion. Again, this would probably be reported on a non-resident return.

This is even more complex because some states use "market based sourcing" which apportions income to where the client is located rather than "cost of performance" sourcing which apportions it to where the work is performed. So if the client is in OK but you did the work while in TX you may need to sort that out. In some cases you might owe tax to both states or neither depending on each state's rules.

I'm a little confused with the reference to 1099 work though. Generally the W2 employee would not receive a 1099 for work performed, the payment would be made to the S-Corp.
Topic Author
EnjoyIt
Posts: 8272
Joined: Sun Dec 29, 2013 7:06 pm

Re: S corp and out of state 1099

Post by EnjoyIt »

MP123 wrote: Thu Sep 16, 2021 12:55 pm Multi-state corporate taxation can be very complex and depends on the specific tax codes in the states in question.

I'm not familiar with TX or OK, but in general an employee performing work in a state is subject to income tax on the income they receive there. They would probably need to file a non-resident return in OK in the situation you describe. The fact that the W2 employee is also an S-Corp shareholder domiciled in a different state doesn't really make any difference.

But as a passthrough shareholder of the S-Corp you would likely also need to apportion part of the S-Corp's income to OK in addition to the wages that you paid yourself there. So the $10k-$2k in your example would leave $8k of net income to be apportioned to Oklahoma. Note this is income that will be on your K1 as a shareholder, not your W2 as an employee. If the S-Corp had $100k of other income from Texas sources then you wouldn't need to pay Oklahoma for that portion. Again, this would probably be reported on a non-resident return.

This is even more complex because some states use "market based sourcing" which apportions income to where the client is located rather than "cost of performance" sourcing which apportions it to where the work is performed. So if the client is in OK but you did the work while in TX you may need to sort that out. In some cases you might owe tax to both states or neither depending on each state's rules.

I'm a little confused with the reference to 1099 work though. Generally the W2 employee would not receive a 1099 for work performed, the payment would be made to the S-Corp.
Thanks for responding because this seems so complicated. Let me elaborate a little. The work performed was out of state in Oklahoma. They will be sending out a 1099 to the S-Corp for services rendered. As an example with simplified figures, the S-Corp receives $100k worth of business in Texas and $10k worth of business in Oklahoma. The business has about $20k in expenses with includes employer taxes the S Corp will pay one employee (me) $60k in W2 income. The rest will be passed through as K1 dividends via the S-Corp.

I just don’t understand how to attribute the $10k from Oklahoma. The employee had to travel, stay in a hotel, eat, rent a car, etc. The S-Corp has office expenses in Texas which set up the Oklahoma work.

Who pays the Oklahoma taxes? Is it the employee via their W2 income and how much of the $10k would be attributed to that? Or is it passed through the S-Corp as dividends to the owner and again, how much of the $10k is attributed to Oklahoma state taxes?
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
User avatar
MP123
Posts: 4084
Joined: Thu Feb 16, 2017 2:32 pm

Re: S corp and out of state 1099

Post by MP123 »

EnjoyIt wrote: Thu Sep 16, 2021 6:46 pm Who pays the Oklahoma taxes? Is it the employee via their W2 income and how much of the $10k would be attributed to that? Or is it passed through the S-Corp as dividends to the owner and again, how much of the $10k is attributed to Oklahoma state taxes?
Most likely it would be you as the employee paying tax on the income that you earned in OK (ie were paid on W2) and you as shareholder paying tax on the portion of the S-Corps profit apportioned to OK.

Apportionment formulas vary by state. Some are simple sales based ratios, in that case you'd apportion 110/10 of the S-Corp profit to OK and pay taxes on that. Other times there are more complex formulas including payroll and office space, but sales is usually part of it.

But in any case you as employee would likely also owe tax on the W2 income you earned in OK. In fact you probably should have withheld taxes on that. So if you were there a month and paid yourself $5k (on W2) that portion of your total W2 would be taxable to OK. It's not a double dip since your payroll is a deduction from the S-Corp profit anyway.

To be clear I don't know Oklahoma's rules but that's the way it works in many states.
Topic Author
EnjoyIt
Posts: 8272
Joined: Sun Dec 29, 2013 7:06 pm

Re: S corp and out of state 1099

Post by EnjoyIt »

MP123 wrote: Thu Sep 16, 2021 8:52 pm
EnjoyIt wrote: Thu Sep 16, 2021 6:46 pm Who pays the Oklahoma taxes? Is it the employee via their W2 income and how much of the $10k would be attributed to that? Or is it passed through the S-Corp as dividends to the owner and again, how much of the $10k is attributed to Oklahoma state taxes?
Most likely it would be you as the employee paying tax on the income that you earned in OK (ie were paid on W2) and you as shareholder paying tax on the portion of the S-Corps profit apportioned to OK.

Apportionment formulas vary by state. Some are simple sales based ratios, in that case you'd apportion 110/10 of the S-Corp profit to OK and pay taxes on that. Other times there are more complex formulas including payroll and office space, but sales is usually part of it.

But in any case you as employee would likely also owe tax on the W2 income you earned in OK. In fact you probably should have withheld taxes on that. So if you were there a month and paid yourself $5k (on W2) that portion of your total W2 would be taxable to OK. It's not a double dip since your payroll is a deduction from the S-Corp profit anyway.

To be clear I don't know Oklahoma's rules but that's the way it works in many states.
Thanks so much for helping me straighten out my brain around all this.

I have not had my employee (me) out there yet and trying to plan on how to do the taxes in advance.
The employee will spend 1 week in Oklahoma and the rest of the month in Texas. If the plan is to do this in Nov and there are 30 days in November does that mean 7/30 days out of that month's $5k pay check are attributed to Oklahoma and Oklahoma tax will need to be paid for 7/30 *$5k = $1166.67 of the W2.

In the example above if Oklahoma contributed $10k out fo the $110k of proceeds to the S-corp, then 10/110 of any passthrough income is attributed to Oklahoma and taxes will need to paid in Oklahoma for that portion. So if there is $15k left on the K1 for passthrough income, Oklahoma taxes will need to paid on (10/110 * $15k = $1363.64.)

Do I have that all correct?
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
User avatar
MP123
Posts: 4084
Joined: Thu Feb 16, 2017 2:32 pm

Re: S corp and out of state 1099

Post by MP123 »

EnjoyIt wrote: Fri Sep 17, 2021 12:24 pm Do I have that all correct?
Yes, that's a good understanding of the basic situation.

You'll need to see how it applies to Oklahoma specifically. For example, they may use a multi-factor apportionment formula which averages in payroll and property ratios along with the sales ratio in your example. This would probably be advantageous since you presumably don't own a big office building in OK and won't have much payroll there. In some states there may be de minimis exceptions where you don't have to file for small amounts of income. On the other hand you may be required to register with their Secretary of State as a foreign corporation, hire a registered agent, and pay franchise fees possibly. Every state has their own approach.

Usually you can take a credit for any taxes paid to another state on your home state's return, but since TX doesn't have an income tax that probably doesn't apply to you.

A good place to start would be to review Oklahoma's S-Corp tax return form and non-resident income tax form.
Post Reply