As a director, your fees are not considered employee wages or a salary (W-2). Instead, the IRS considers you to be an independent contractor and your income is reported on Form 1099-MISC in Box 7 (Nonemployee Compensation) and this is what you will use when you file your Form 1040 (Schedule C). Because your company does not withhold federal income, Social Security or Medicare taxes from your income, you are responsible for any and all additional taxes you potentially owe, most notably the self-employment tax which consists of Social Security and Medicare portions. However, you may be able to deduct half of this tax as an adjustment to income.
Business Expense vs. Itemized Deduction:
As an independent contractor, you should take advantage of a number of money-saving deductions. Expenses that are typical of doing business (ex. hotel costs, meal expenses) can be written off against your pre-taxed income and are not subject to income-based deduction limits. However, if you are both an investor and a director, these expenses are considered investment expenses and reported as misc. itemized deductions, which can only be deducted by the amount that it exceeds 2% of your adjusted gross income.
Calculating Net Deduction for Investment Expenses:
Total Itemized Deduction – (2% x AGI) = Total Net Deduction
Example. $1000 – (0.02 x $40,000) = $200
In this case, if you spent $1000, the deduction you would receive would only be $200.
If your company reimburses you for business expenses, these reimbursements are included in the income reported on Form 1099-MISC and are canceled out by the expenses you list on your 1040 so that only your “true” income is taxed.
Postponing Tax on Income (Keogh plan):
It is possible to postpone paying tax on income by making deductible contributions up to 25% of qualifying income (max $56,000 as of 2019) on a retirement or profit-sharing plan.
Other Types of Benefits:
HSA Contributions: If your company pays on your behalf, these contributions are included in your reported income on Form 1099-MISC, however, these contributions can be deducted on your income tax returns.
Term Life Insurance: The premium payments made by your company on your behalf are reported on Form 1099-MISC and are subject to a self-employment tax.
BOLI: An amount of the imputed income is reported on Form 1099-MISC to avoid taxation of the life insurance death benefit.
Filing your taxes can become more complicated if you work for the company in both a directorial and employee capacity. Any income you receive in your capacity as an employee will be reported on Form W-2. Under special circumstances, it is possible for you to receive a Form 1099-MISC and W-2 in which case you might need to complete Form W-4 in order to withhold federal and state taxes on your W-2.
The information contained in this post is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. In all cases, you should consult with professional advisors, familiar with your particular factual situation, for advice concerning specific matters before making any decisions.