6 ms·

Liability protection, if nothing else. If someone sues a company, they can't (in theory) take the CEO's house. Also, in the US, you can save a bunch of money on

Liability protection, if nothing else. If someone sues a company, they can't (in theory) take the CEO's house. Also, in the US, you can save a bunch of money on payroll taxes if you elect to be taxed as an S-corp. The short version is that you only pay those taxes (Social Security, FICA, Medicare, etc etc) on money you get in paychecks -- so, if you make $100k in a year and "pay" yourself $70k, you end up with the other $30k but didn't have to pay a bunch of tax on it.

blackbagboys 10y ago
What becomes of that other $30k? I assume there's a reason why you wouldn't just pay yourself $30k and keep the tax-free $70k.
- idlewords 10y ago
  It has to sit within the company. You can use it to buy an ice sculpture for the office lobby, but not for your own palazzo. As you can imagine, there is a ton of bookkeeping and bureaucratic pain associated with having an S-corp (like pretending to have annual meetings, and having to write minutes for them).
  - zrail 10y ago
    You can have an LLC that's just taxed as an S-corp. For IRS purposes you're an LLC but for bureaucratic state level bullshit purposes you're an LLC.
  - rev_bird 10y ago
    >It has to sit within the company. I don't think this is true. If you buy an ice sculpture for the office lobby, it's totally tax deductible (it's a business expense), but you can use money for whatever you want if you take it out of the bank as a "distribution" instead of a "paycheck." In that situation, you still pay income tax on the money, but not the other taxes.
    - jessaustin 10y ago
      IANAL, but this might still cause trouble if the firm has cashflow issues. If there's a $10k distribution one quarter, and the next quarter a $10k bill can't be paid, suddenly you're pierced.
  - deleted 10y ago
    [deleted]
  - tptacek 10y ago
    The other half of the "claim a low salary" S-corp dodge is that distributions (the standard way LLC's pay their principals, and the standard way S-corps pay "profit sharing") aren't payroll-taxed (technically: aren't self-employment taxed). So I think the trick here is, you pay yourself $70k in salary, but issue yourself a $30k profit sharing distribution.
  - pw 10y ago
    I can attest that having a S-corp is a lot of work (or, rather, is expensive 'cause you usually just pay a lawyer to deal with all the bookkeeping and other requirements).
- oldprogrammer2 10y ago
  The IRS, according to FS-2008-25, requires the salary to be "reasonable", and they list factors that would be considered by the courts if a dispute arose. The IRS also has the authority to reassign dividends or distributions as compensation.
idlewords 10y ago
In many states your house is protected even as a sole proprietor.
tptacek 10y ago
It's probably not a good idea to try to "save money" on your taxes by claiming a low income and distributing yourself whatever's on the balance sheet later on; it's apparently a notorious audit flag. Respectfully: it's also unethical, if you think about it carefully. Pay full freight on your payroll taxes: if you make so much much money that this dodge is material to you, you're the last person who should have a loophole to take advantage of.
- pw 10y ago
  Apparently it's pretty safe from an audit standpoint if you pay yourself at least $118,500, the maximum amount that is taxable for Social Security. Of course, that means you just save the 2.9% tax for Medicare on any remaining income. Still, I totally agree that it's unethical.
  - pw 10y ago
    See here for details, as well as a good person to follow if you find taxes interesting: http://www.forbes.com/sites/anthonynitti/2016/08/12/clintons-paid-3-6-million-in-federal-tax-in-2015-could-should-have-paid-a-lot-less/ http://www.forbes.com/sites/anthonynitti/2016/08/12/clintons...
  - zrail 10y ago
    My accountant put it this way: nobody gets audited for paying themselves more than zero salary. Reasonable salary comes into play if you get audited for something else.
    - tptacek 10y ago
      So that's the opposite of what mine said, but: definitely I think you should listen to your accountant more carefully than HN comments.
      - koolba 10y ago
        > So that's the opposite of what mine said, but: definitely I think you should listen to your accountant more carefully than HN comments. Ha! "But foobar22 on the internets said it'd be okay if I claimed X as a deduction? Why am I being auditing?!" There should be a global disclaimer when you sign up for an HN account that tells you to listen to your lawyer, your doctor, your accountant ...

blackbagboys 10y ago

What becomes of that other $30k? I assume there's a reason why you wouldn't just pay yourself $30k and keep the tax-free $70k.

idlewords 10y ago
It has to sit within the company. You can use it to buy an ice sculpture for the office lobby, but not for your own palazzo. As you can imagine, there is a ton of bookkeeping and bureaucratic pain associated with having an S-corp (like pretending to have annual meetings, and having to write minutes for them).
- zrail 10y ago
  You can have an LLC that's just taxed as an S-corp. For IRS purposes you're an LLC but for bureaucratic state level bullshit purposes you're an LLC.
- rev_bird 10y ago
  >It has to sit within the company. I don't think this is true. If you buy an ice sculpture for the office lobby, it's totally tax deductible (it's a business expense), but you can use money for whatever you want if you take it out of the bank as a "distribution" instead of a "paycheck." In that situation, you still pay income tax on the money, but not the other taxes.
  - jessaustin 10y ago
    IANAL, but this might still cause trouble if the firm has cashflow issues. If there's a $10k distribution one quarter, and the next quarter a $10k bill can't be paid, suddenly you're pierced.
- deleted 10y ago
  [deleted]
- tptacek 10y ago
  The other half of the "claim a low salary" S-corp dodge is that distributions (the standard way LLC's pay their principals, and the standard way S-corps pay "profit sharing") aren't payroll-taxed (technically: aren't self-employment taxed). So I think the trick here is, you pay yourself $70k in salary, but issue yourself a $30k profit sharing distribution.
- pw 10y ago
  I can attest that having a S-corp is a lot of work (or, rather, is expensive 'cause you usually just pay a lawyer to deal with all the bookkeeping and other requirements).
oldprogrammer2 10y ago
The IRS, according to FS-2008-25, requires the salary to be "reasonable", and they list factors that would be considered by the courts if a dispute arose. The IRS also has the authority to reassign dividends or distributions as compensation.

idlewords 10y ago

In many states your house is protected even as a sole proprietor.

tptacek 10y ago

It's probably not a good idea to try to "save money" on your taxes by claiming a low income and distributing yourself whatever's on the balance sheet later on; it's apparently a notorious audit flag. Respectfully: it's also unethical, if you think about it carefully. Pay full freight on your payroll taxes: if you make so much much money that this dodge is material to you, you're the last person who should have a loophole to take advantage of.

pw 10y ago
Apparently it's pretty safe from an audit standpoint if you pay yourself at least $118,500, the maximum amount that is taxable for Social Security. Of course, that means you just save the 2.9% tax for Medicare on any remaining income. Still, I totally agree that it's unethical.
- pw 10y ago
  See here for details, as well as a good person to follow if you find taxes interesting: http://www.forbes.com/sites/anthonynitti/2016/08/12/clintons-paid-3-6-million-in-federal-tax-in-2015-could-should-have-paid-a-lot-less/ http://www.forbes.com/sites/anthonynitti/2016/08/12/clintons...
- zrail 10y ago
  My accountant put it this way: nobody gets audited for paying themselves more than zero salary. Reasonable salary comes into play if you get audited for something else.
  - tptacek 10y ago
    So that's the opposite of what mine said, but: definitely I think you should listen to your accountant more carefully than HN comments.
    - koolba 10y ago
      > So that's the opposite of what mine said, but: definitely I think you should listen to your accountant more carefully than HN comments. Ha! "But foobar22 on the internets said it'd be okay if I claimed X as a deduction? Why am I being auditing?!" There should be a global disclaimer when you sign up for an HN account that tells you to listen to your lawyer, your doctor, your accountant ...