Are the parents who own all or part of an LLC that elects to file taxes as an S corporation self-employed?
When we attempted to register, question 17 asks if the parents are self-employed and #18 asks how many businesses the parents own all or part of. We own a percentage of two LLC’s that file taxes as an S corp and we receive W2’s and K1’s from the businesses. So the answer to 17 we entered was “No” and the answer to 18 was “2”. Upon saving we were warned to “correct” the entries because we had businesses.
According to the IRS if an LLC elects to file taxes as an S corporation, or the business is a C corporation, then the individual is not technically self-employed, they are “owner-employee”.
I called Profile to determine if the IRS interpretation applied, and if so what should I enter to get rid of the warning. I described the situation and after 10 minutes of being on hold she returned and asked if I filed a schedule C, and I told them “No, the business incomes are reported on K-1s”. She informed my I was not considered self-employed.
The agent instructed me to answer that I was not self-employed, but to input the number of businesses. Then ignore the warning and select sontinue.
I hope this helps others, as I have scoured the internet to answer this issue.
Our school and most of our peers would actually say you got bad information from the College Board. If you own any businesses (Sole Prop, C Corp, S Corp, or Partnership) we would very much prefer that you answer the question “yes”. Otherwise you do not get tracked properly and it can greatly delay the financial process. The inability to properly identify business owners and therefore properly track and process their children’s files due to them answering “no” to this question is a common compliant among our peer group.
@bschooltotech I’m not sure what not getting “tracked properly” means. Can you explain? Like the OP, we are owner-employees of an S Corp and I would never in a million years describe us as self employed. Do FA departments understand the difference? (I’m not being sarcastic, really do want to know).
Many schools process applications from business owners differently than applications from non business owners. They might be read by different people or have different requirements or different timetables. In addition, there is usually dynamic questioning on the CSS Profile than can be impacted. This workflow management is most commonly based off that first question on your CSS Profile not on the second. A typical example would be a family like yours. If you say you don’t own a business we are not going to ask for your business tax returns until a reader has reviewed your file seen the Schedule E and can manually post the 1120-S and K-1 as requirements. If you indicate you own a business you will have to provide additional information on the CSS Profile and more importantly your business requirements will be properly posted to your students “portal” automatically. This is an extremely common pet peeve I hear colleagues from peer institutions complain about all the time. For financial aid purposes if you own more than 1%-5% of an entity (Partnership, Corporation, or any variation thereof) you own a business. We make no distinction between “self employed” and “own a business” because for aid purposes there is no distinction. Expenses are treated the same whether they are on a Schedule C, Schedule E, 1120-S, 1120, or 1065.
@bschooltotech thx for the reply. This ^ seems like the root of the problem, and one that folks on your side of things may want to address. There is a big distinction between those two things in the real world, and it’s surprising that institutions would expect people to knowingly misstate a business structure just because the form, or institutional practices, aren’t well thought out. Seems like an easy fix: use the second question to route the FA app, not the first.
If you are trying to determine whether somebody owns a business, have the form ask them *that/i.
I will also suggest that (1) some people who are in actuality self-employed may not realize that fact (e.g. people who are considered independent contractors by their “employer”); and (2) some people who are self-employed sole-proprietors might not think of themselves as “owning a business” (e.g. because they think of a business as something with employees, etc…).