5 ms·

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

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.