payroll for shareholder (US Citizen) residing in Turkey

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#1
pkaria  
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I have a client (US Citizen) who is a 50% shareholder in a recently founded S Corp registered in California, but residing in Turkey. He is a registered resident of South Dakota since it has no state tax. He is active and selling remotely for the business and would like to be compensated just like his partner in California. Any thoughts on what is the best (most tax effective) way for the company to pay him? Here are the questions/options that come to mind,
1. If we keep it simple and have him on regular payroll, he will have to pay CA taxes, which he doesn't want.
2. if we run his payroll as a SD resident then does the company need to register in SD? Except requiring to file payroll returns in SD, what will be the other implications of this for the S Corp?
3. Can we pay him as 1099? Can a shareholder be on 1099? This would subject him to Self Employment taxes, which would make him pay more payroll tax than his partner.
4. Any thing else that I am missing?
 

#2
sjrcpa  
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He's going to have to pay CA income tax on his share of the S Corp's CA earnings.
He should get a W-2. Not CA wages if he neither lives nor works in CA. Ditto for SD.
What does
pkaria wrote:is a registered resident of South Dakota
mean?
 

#3
pkaria  
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Thanks. I agree that for his K1 income (if any), he will have to pay CA tax. He just does not want to pay CA tax on his W2 income. What I mean by SD resident is that he uses a SD address and has a SD Driver's license.
 

#4
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Hmm. Are you sure another state with which he has ties will not try to claim her is still domiciled there?
 

#5
pkaria  
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I am not sure what would be the impact if the state does not have income tax. That's why i am here :)
 

#6
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The impact is that another state might argue that the client is domiciled in that state and seek state income tax. What ties does he have to other states where there is an income tax? Does he own, for example, real property in California, for instance? Does he have a driver's license issued by a US state? Is he registered to vote anywhere?
 


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