Salary paid to the CEO

There are so many ways to answer this question. At first blush, payment to another company is a contractor/consultant relationship, booked as an expense, and a 1099 provided at the end of the year.

However, my recommendation is to look at it from the way the IRS would look at it (http://www.irs.gov/taxtopics/tc762.html). The government has always threatened to crack down on companies that designate employees incorrectly as independent contractors. In the next few years I believe they will follow through, as you are not required to provide medical benefits to an independent contractor. The government will want to be sure that employees are not designated as independent contractors to avoid the Affordable Care Act.

In conclusion - understand the designation of the individual and book accordingly.

I agree with Regis in his description of the 1099 relationship. The way you are describing the payments it appears to be a contractor/consultant relationship. I also agree that there is risk associated with paying someone on a contractor basis when they should be classified as an employee. The IRS sees that as a way of avoiding the payroll tax and states will see that as a way of avoiding UI tax. Keep in mind, however, that the role of CEO is generally not considered to be a subcontracted role.

Is there a contract between the CEO and the company. That document could be very helpful in figuring out the correct designation as it may describe the reporting structure of this individual's position.

One other point that should be considered. If this is a small company and the CEO is one of the owners, I would recommend you at least pay a W-2 salary that helps the CEO max out their Social Security tax. It generally makes sense to put the payroll tax expense onto the company because the company can take it as a deduction against its own taxes. If you are dealing with a small company where the CEO is the owner, then this would be a good way to save a few pennies.

On a final note, you may want to discuss, with your CEO, if there are any legal reasons for the designation as a contractor. Is this person trying to protect him/herself from some form of liability related to their activities as CEO. OR... are they attempting to protect the company from some form of liability from their personal activities or activities with some other organization. It isn't just the accounting that can make or break this decision on handling the payment to the CEO.

As Regis said, there are many, many ways to answer this question. I hope these 4 paragraphs provide some food for thought.

I would book as consulting fee.