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  • When Entity Compensation of Officers does not match 1040 wages

Carmen’s Question:

When an entity pays out “compensation of officers,” is that shown as wage income to the officers?  I don’t feel that I have been able to directly correlate those items, and feel they could be different.

If a shareholder / member / partner is paid $50,000 in officer compensation, should that individual’s personal 1040 show that same $50,000 in wage income?

If not, is that something we need to manually enter to offset that expense of the entity?

Linda’s Answer:

The compensation of officers on the entity return can be different than the wages reported on the 1040 for several reasons:

The entity return is on a fiscal year other than a calendar year.

1040 wages are based on wages received during the calendar year. As long as they are not vastly different, I do not sweat. It is true, however, that if your guidelines call for eliminations in a global analysis, the wage income in the personal return may not be the same number as the wage expense in the entity return,  so your elimination column will not net to zero. (And if that last sentence did not make sense, my guess is your company does not do eliminations in global analysis. No worries.)

The officer has 401k or other deductions from their wages that reduce the amount taxable in the 1040.

If you have the W-2, you can see the medicare wages which would tie back to a calendar year entity return.

Bottom line, if the difference makes sense because of fiscal vs calendar year or non-taxed wages due to retirement deductions, no need to pursue if further.

For more on global analysis of tax returns:

Intro ModuleClick through to www.LendersOnlineTraining.com for thorough training on tax return analysis, designed to help lending and credit professionals say ‘YES’ to good loans.

 

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Linda Keith, CPA


Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis.
She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans.
Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.

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