Often, we are engaged to evaluate the lost earnings claims of individuals involved in an automobile accident. In certain instances, we are evaluating a claim for an individual who is the sole owner of a corporation. In most cases, the injured party is making a claim for lost wages. The wages the owner/Insured receives are derived from the company and are commonly referred to as ‘Compensation of Officers’. This expense is distributed based on the profits of the company. Thus, when a sole owner of a corporation discontinues the payment of their wages, it does not necessarily mean they will suffer a loss of earnings.
Conversely, most self-employed individuals who are sole proprietors file a Form Schedule C with their personal income tax return to report the business income and expenses. Sole proprietors do not have the ability to deduct wages to themselves on a Form Schedule C. An owner of a corporation can deduct compensation of officer’s expenses on the corporate income tax returns, Forms 1120 or 1120S. Therefore, the sole proprietor’s income is derived from the net income of the business, or the difference between gross earnings/sales and expenses.
When a sole owner of a corporation receives compensation through wages, those wages are derived from the gross earnings/sales and expenses of the company. When evaluating these types of income loss claims, we review the wages paid, along with the gross earnings/sales and expenses of the corporation. Generally, if there is one owner and no employees, and the owner is not able to work, the company will most likely lose sales and eventually lose profits. However, if the company has employees/subcontractors who continue to work and generate earnings, the company may not experience a decline in gross earnings/sales or net income. In these cases, if the company continues to generate earnings/sales, the owner has the option to pay themselves wages. If they elect not to pay themselves wages, typically the cessation of wages will lead to lower operating expenses and a greater net income, resulting in no loss of earnings for the individual making the claim.
When dealing with corporations with more than one owner, as well as partnerships, the analyses are more complicated and depend on the number of owners, partners and their percentage of ownership interest. In these situations we typically analyze the wages or guaranteed partner payments, along with the gross earnings/sales and expenses of the company to determine a loss of income. Any loss of income with multiple owners is typically calculated based on the ownership percentage of the injured party.