1120-US: Calculating employer's W-2 wages reported in Code 12R on Schedule K-1 (FAQ)

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Question

How are employer's W-2 wages reported in Code 12R on Schedule K-1 calculated?

Answer

Regulation 1.199-5(c)(3) applies to pass-through entities for taxable years beginning after May 17, 2006, the enactment date of the Tax Increase Prevention Act of 2005. The regulation states the shareholder's share of the S Corporation's wages calculated in Regulation 1.199-2(e)(2) is equal to the shareholder's allocable share of those wages. If the S Corporation is using the Section 861 method or the simplified deduction method, Form W-2 wages are calculated under Regulation 1.199-2(e)(2)(ii) or another reasonable method that is satisfactory to the IRS. If the S Corporation is using the small business simplified overall method, Form W-2 wages are calculated under Regulation 1.199-2(e)(2)(iii) or another reasonable method that is satisfactory to the IRS.

If the S Corporation is using the simplified deduction method to calculate QPAI and W-2 wages, enter the wages allocable to domestic production gross receipts in the applicable field in Screen 8903S. You must also use this field if the S Corporation does not calculate QPAI and W-2 wages at the entity level. UltraTax/1120 generates a critical diagnostic message when code 2 or 3 is entered in the Allocation method field in Screen 8903S and the Wages allocable to DPGR field is blank.

If the S Corporation is using the small business simplified overall method to calculate QPAI and W-2 wages, UltraTax/1120 calculates the W-2 wages using the safe harbor method in Regulation 1.199-2(e)(2)(iii). Enter an amount in the Employer's Form W-2 wages (Force) field in Screen 8903S to change the calculated amount when code 1 is entered in the Allocation method field in Screen 8903S.

Related topic: 1120-US: Domestic production information for S Corporations FAQs

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