My S-corp (I am its W-2 employee) sends me to work for a client who pays the S-corp for my work and issues a 1099 to the S-corp.
Now the client wants to give me a bonus ($1000) directly (check made out to me) and not to the S-corp.
My questions:
Is this legal?
If so, what are the tax implications?
Does the client have to issue 2 1099s (one to S-corp and one to me)? How do I input this in my personal tax return?
Would it be better for me (less hassle, etc…) to tell the client to make the bonus check out to the S-corp?
You’re definitely better off having the check go to the S Corporation. Having a 1099 issued directly to you as an individual means the IRS will expect to see a Sch C for a sole proprietor. There are some ways to resolve this without having to pay SE tax and the like, but it’s much cleaner to have it go to the S Corp. It also avoids any messes at the state level.
As for whether it is legal… it may partly depend on the type of work and the licenses required. As an example, if a contractor’s license is required, the corporation may have the license and not the individual, so a payment to the individual is compensation to an unlicensed contractor. The same may be true for many other professional licenses and even general state/local business licensing.
It may also be legal, but against contractual agreements. For example, if they’re thinking of the $1000 as a tip, many companies set up rules about whether employees can accept such a large tip. (The rules are designed to prevent the tip from being a bribe, essentially). Employees may be bound by non-competes with their company, to prevent them from undercutting their own employer for work they do on the side. But since you own the company, those kinds of agreements are probably not in place.