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I think you have it the wrong way around. Their salary was $100k, of which (say) $80k was returned as a loan from the founder to the company. This lets the co

I think you have it the wrong way around. Their salary was $100k, of which (say) $80k was returned as a loan from the founder to the company. This lets the company book $100k of costs on a net cash outflow of $20k. Costs are applied before calculating profit and therefore before calculating taxation due. At a corporate tax rate of 20% that would be worth $16k more than the tax deduction due from paying salaries of $20k. Tax losses can be deferred until you make a profit in most tax regimes so that $16k will be held over until you need it to avoid paying taxes on the first $80k of corporate profits no matter when they happen. It may also be possible to essentially sell tax savings to other companies under some circumstances (usually when winding up a company). Overall this scheme would probably cost money as employment taxes would be due. But that can vary depending on other tax breaks, especially in progressive taxation systems. You may also be able to do something interesting with loan interest repayments which are often subject to tax breaks. Tax codes for Western countries are huge and full of interesting possibilities!

alexsolo 16y ago
It's good for the company, that makes sense. What I don't get is, if you pay yourself $100K, aren't you personally taxed on your 100K income? Or, will you claim you only had a 100K - 80K = 20K income on your personal taxes? I would think the government would try to match up the $100K company expense with a $100K personal income (and if they don't match, audit you). I'm actually really curious if you can pull this kind of thing off.
- angilly 16y ago
  My position is that the salaries were really just our egos. We didn't have the money to pay ourselves over $100k. The $20k "example" is actually pretty close. Ideally, take what you can to pay your mortgage. Put that on the books. Spend time getting profitable instead of balancing the books. If you become profitable, or get a nice round, it'll all work out :)
- notauser 16y ago
  You are correct that taxes would be owed on $100k of personal income. This may be less than the expected saving from avoiding corporate income tax due to: - Tax free personal allowance (soon to be $15k for the UK). - Tiered rates of personal income tax (for example a 10% lower band up to a threshold). - Deductions or grants for persons working in enterprise zones/for small companies/for start ups/for technology companies/in strategic industries which are only reclaimable once personal income crosses a threshold. (Common in places like Northern Ireland.) - Employees and employers not in the same tax region, allowing for {evasion|avoidance} schemes. The whole thing gets really complicated very quickly, and if your two man startup is engaged in tax manipulation to that level you are probably missing the forest for the trees. If a $20k tax saving distracts you from a shot at a $1bn market you are doing it wrong. (Unless you know a huge check is arriving next quarter, or some other special circumstance applies.)

alexsolo 16y ago

It's good for the company, that makes sense. What I don't get is, if you pay yourself $100K, aren't you personally taxed on your 100K income? Or, will you claim you only had a 100K - 80K = 20K income on your personal taxes? I would think the government would try to match up the $100K company expense with a $100K personal income (and if they don't match, audit you). I'm actually really curious if you can pull this kind of thing off.

angilly 16y ago
My position is that the salaries were really just our egos. We didn't have the money to pay ourselves over $100k. The $20k "example" is actually pretty close. Ideally, take what you can to pay your mortgage. Put that on the books. Spend time getting profitable instead of balancing the books. If you become profitable, or get a nice round, it'll all work out :)
notauser 16y ago
You are correct that taxes would be owed on $100k of personal income. This may be less than the expected saving from avoiding corporate income tax due to: - Tax free personal allowance (soon to be $15k for the UK). - Tiered rates of personal income tax (for example a 10% lower band up to a threshold). - Deductions or grants for persons working in enterprise zones/for small companies/for start ups/for technology companies/in strategic industries which are only reclaimable once personal income crosses a threshold. (Common in places like Northern Ireland.) - Employees and employers not in the same tax region, allowing for {evasion|avoidance} schemes. The whole thing gets really complicated very quickly, and if your two man startup is engaged in tax manipulation to that level you are probably missing the forest for the trees. If a $20k tax saving distracts you from a shot at a $1bn market you are doing it wrong. (Unless you know a huge check is arriving next quarter, or some other special circumstance applies.)