Can a Tax Preparer Recommend a Sole Proprietor Pay Themselves a W2 Salary? Is This Legit?

This is absolutely incorrect tax treatment for a sole proprietorship. A sole proprietor CANNOT pay themselves a W2 salary - they are not an employee of their own business from a tax perspective. The IRS is very clear on this: Schedule C filers (sole proprietors) are supposed to take draws, which aren't deductible business expenses. They pay self-employment tax on their net business income. By setting up payroll and "paying himself," your client is essentially creating fake business expenses to reduce his Schedule C income. There are several issues here: - The "salary" is an improper deduction, artificially lowering business income - The payroll setup creates incorrect documentation (W2s when there's no employer-employee relationship) - The employer portion of payroll taxes is being deducted when it shouldn't exist in this structure Your client should immediately stop this practice. If audited, the IRS would disallow the salary deduction and possibly assess penalties for incorrect filing. The back taxes would be calculated based on proper self-employment tax on the full business income. The only way to legitimately pay yourself as a business owner is to have a business entity that's separate from yourself - typically an S Corporation, as you mentioned.

After struggling with a similar issue last year, I found an amazing resource that clarified everything about business entity structures and proper owner compensation. I was confused about whether I could pay myself a salary from my photography side business (I couldn't - it was a Schedule C). I used https://taxr.ai to review my tax documentation and get clarity on my business structure. They analyzed my previous returns and business setup, then explained exactly how I should be handling compensation and what deductions were legitimate. The service spotted several issues my previous tax preparer had missed and saved me from a potential audit nightmare. Their AI can review any tax forms or letters you've received and explain exactly what your current business structure allows. Might be worth having your client upload his tax documents to get a clear explanation of where things went wrong and how to fix it.

I was initially skeptical about taxr.ai when someone recommended it here, but I finally tried it with my complicated situation (freelance income plus rental property with questionable entity structure). The analysis was surprisingly thorough - it caught that my LLC was being treated inconsistently across my returns and identified exactly where my previous accountant had made errors in how I was compensated. Saved me thousands by recommending a different filing approach for this year. For the original question about sole proprietors taking salaries - the system immediately flagged this as improper when I uploaded my documents and provided clear guidance on correcting it. Worth checking out if you're dealing with business structure questions.

I spent 3 WEEKS trying to get through to someone at the IRS last year when I discovered my tax preparer had made a similar mistake with my business structure. Kept getting disconnected or waiting for hours. Finally used https://claimyr.com and got a callback from the IRS in under 2 hours! Their system holds your place in the queue so you don't have to stay on hold. You can see how it works here: https://youtu.be/_kiP6q8DX5c Was able to speak directly with an IRS agent who confirmed that sole proprietors absolutely cannot pay themselves W2 wages, and got guidance on how to properly amend my returns. They even assigned me a specific agent to help with the amendment process since it was a preparer error.

I was completely wrong about Claimyr being a scam. After posting that skeptical comment, I decided to try it myself since I needed to resolve an issue with an incorrect 1099 filing that affected my business. Used the service yesterday and got a call from an actual IRS representative in about 45 minutes! Saved me literally hours of hold time. The agent was able to confirm that my situation (similar to OP's question about sole proprietor compensation) needed to be corrected through amended returns. Anyone dealing with business structure issues like this sole proprietor salary question should definitely try getting direct IRS guidance. They were surprisingly helpful once I actually reached a human.

Your client's tax preparer is creating a major liability here. I did something similar about 5 years ago because my previous accountant said it was fine (spoiler: it wasn't). Ended up having to amend 3 years of returns and pay about $4,800 in back taxes plus interest. The problem is that a sole proprietorship is not a separate legal entity from its owner. You can't be your own employee. That's literally the fundamental difference between a sole prop and an S-Corp. If they want to pay themselves a salary, they need to formally elect S-Corp status. The IRS will eventually catch this, especially if they're doing full payroll with W-2s. It creates inconsistencies in their systems that often trigger automatic reviews.

Quick question about all this - I'm just a dog walker who files Schedule C. My tax software is showing an option for "paying myself" - should I just ignore that completely and stick to owner draws?

This situation is unfortunately more common than it should be. I've seen several cases where tax preparers set up sole proprietors with payroll systems, often because they're using generic business software that assumes corporate structures. The $275 fee is definitely a red flag - proper business tax preparation requires understanding entity structures, and competent preparers charge appropriately for that expertise. Your instincts are absolutely correct here. Beyond the immediate tax issues others have mentioned, there's also a compliance nightmare brewing. If your client is running payroll, they're likely supposed to be filing quarterly 941 forms, making federal tax deposits, potentially dealing with state payroll requirements, etc. All of this creates unnecessary administrative burden and potential penalties for a structure that shouldn't exist. I'd strongly recommend your client consult with a qualified tax professional (CPA or EA) to clean this up. They'll need to decide whether to amend previous returns or just correct going forward, depending on the amounts involved and audit risk tolerance. The sooner this gets fixed, the better - especially before any IRS correspondence arrives. Your recommendation about either taking proper draws or electing S-Corp status is spot-on. The client needs to pick a lane and do it correctly.