By Paul S. Hamann & Jack Salewski, CPA, CGMA
What is the correct treatment of Director’s Fees? Is it a W-2 or a 1099? Let’s take an in-depth dive into this question.
If you were to look at the issue without a lot of critical thought you might conclude that the Director’s compensation should be reported on a W-2. Your reasoning would be this: In order for the compensation to be reported on a 1099 the Director would need to be independent of the corporation. How can a Director be truly independent of a business that they influence and guide?
The distinction missing from this analysis is that the Director is not “controlled by” the corporation but “directs” the corporation. The Directors are paid for their “independent thought, guidance and expertise.”* This is true even if the Director is an employee for other services rendered. Even the Internal Revenue Service’s website indicates Director’s fees are considered self-employment income.
Because the Director is considered as being in the “business” of being a corporate director, any ordinary, necessary and reasonable expenses as well as the Director’s Fee income would be reported on the individual’s schedule C. This would also mean that the Director may be able to set up a retirement plan to offset some of this income. If the Director is also an investor in the business, expenses will need to be allocated between director expense on schedule C and investor expenses on schedule A.
*A word of caution on Officers. Officers and Directors are not the same. Officers are controlled by the corporation and would be considered employees. For more see Blodgett T.C. Memo 2012-298