Form 1125-E Instructions for Compensation of Officers

Form 1125-E, Compensation of Officers, is a supplemental schedule that corporations must file with their annual income tax return. Its purpose is to provide the Internal Revenue Service (IRS) with a detailed report of the compensation paid to the corporation’s officers. This form is required for any corporation, including C corporations and S corporations, that has total receipts of $500,000 or more for the tax year and claims a deduction for officer compensation. The form ensures transparency in how a company remunerates its top executives.

Filing this form helps the IRS verify that the compensation amounts are reasonable and not disguised dividends. It is not a standalone return but must be attached to the main corporate tax form, such as Form 1120 or Form 1120-S.

Determining Who is an Officer

The definition of an “officer” for the purposes of Form 1125-E is determined by an individual’s duties and authority within the corporation, not simply by their title. The IRS considers an officer to be a person who is actively involved in the management of the corporation’s daily affairs. This typically includes positions such as president, vice president, secretary, and treasurer.

An employee who has the authority to perform significant management functions is considered an officer, regardless of their official job title. For example, a general manager with broad decision-making power would likely be classified as an officer. The key is whether the individual has the power to bind the corporation or plays a substantial part in shaping its policies and strategic direction. Therefore, a company must carefully evaluate the actual responsibilities of its key personnel to determine who must be included on Form 1125-E.

Information Required for Form 1125-E

Columns (a) and (b) of the form require the officer’s full name and Social Security Number (SSN). For privacy, filers have the option to truncate the SSN, showing only the last four digits. This basic identification information is the starting point for each officer’s entry on the form.

Column (c) asks for the percentage of time the officer devoted to the business during the tax year. This figure is an estimate based on the officer’s total working hours. To calculate it, one would typically divide the hours the officer spent on corporate business by their total hours worked across all professional activities. For an officer who works exclusively for the corporation, this would be 100%.

Columns (d) and (e) require the percentage of the corporation’s stock owned by each officer. This must include both common and preferred stock. The calculation should account for both direct ownership (stock held in the officer’s name) and indirect ownership, such as stock owned by a spouse or minor children.

Finally, column (f) is for the amount of compensation. This figure includes more than just base salary; it encompasses all remuneration for services. Corporations must report salaries, wages, bonuses, commissions, and the value of any taxable fringe benefits, such as personal use of a company car. It is important to note that dividend distributions are not considered compensation and should not be included in this amount.

Completing and Filing the Form

Each officer will have their own line on the form, where their name, SSN, time percentage, stock ownership, and total compensation are entered into columns (a) through (f). Accuracy is important to ensure the form aligns with other financial records like payroll reports and W-2s.

After listing all officers and their compensation in column (f), the amounts must be summed. This total is entered on line 2 of Form 1125-E. This figure represents the corporation’s total gross deduction for officer compensation before any adjustments.

The total from line 2 is then carried over to the corporation’s main income tax return. For a standard C corporation, this amount is entered on line 13 of Form 1120. For an S corporation, the corresponding line is on Form 1120-S.

The final action is to attach the completed Form 1125-E to the corporation’s primary tax return before it is filed. The form’s due date is tied to the deadline of the return it accompanies. For S corporations filing Form 1120-S, the deadline is the 15th day of the third month after the tax year ends. For C corporations filing Form 1120, the deadline is the 15th day of the fourth month after the tax year ends.