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You're making the assumption that all S-corp distributions amount to "hiding wages". Most accountants will tell you that IRS regulations disagree with you on th

by credo 16y ago

You're making the assumption that all S-corp distributions amount to "hiding wages". Most accountants will tell you that IRS regulations disagree with you on that point. I see that you didn't respond to the reverse-loophole point on FUTA taxes. Why should a company pay unemployment insurance taxes for founder-employees when these employees can never claim unemployment allowances ?

tptacek 16y ago
The general line of argument would be that FUTA payments fund a broad social safety net, and that no "insurance" payment we make to the government has implied 1:1 benefits for the payers. But we don't have to bother with that argument because I agree with you on that point. The general logic of the tax code and the IRS' enforcement of it seems to be that as an employee of a company --- which you are unless there's some patently obvious reason why you would be performing services for the company otherwise --- then your role has a fair market value. If you make at least that amount of money in any way, you owe payroll taxes on it. Over that amount, you don't. The reality of the software business is, if you're a principal, founder, officer, director, or lead at a company that can afford to distribute tens of thousands of dollars to its employees, your fair market value is probably greater than the FICA cap, and the notion of what "is" or "isn't" a distribution is academic. Are there scenarios where people are legitimately taking profit sharing distros that are not, under the spirit of the tax code, wages? I'm sure there are. Do those scenarios really account for a significant fraction of the cases where people take a "wage/distro split"? I really doubt it. My casual sense of it is, people that take a "wage/distro split" feel entitled to pay lower taxes simply because they've finagled themselves into an S-Corp.

by credo 16y ago

tptacek 16y ago

The general line of argument would be that FUTA payments fund a broad social safety net, and that no "insurance" payment we make to the government has implied 1:1 benefits for the payers. But we don't have to bother with that argument because I agree with you on that point. The general logic of the tax code and the IRS' enforcement of it seems to be that as an employee of a company --- which you are unless there's some patently obvious reason why you would be performing services for the company otherwise --- then your role has a fair market value. If you make at least that amount of money in any way, you owe payroll taxes on it. Over that amount, you don't. The reality of the software business is, if you're a principal, founder, officer, director, or lead at a company that can afford to distribute tens of thousands of dollars to its employees, your fair market value is probably greater than the FICA cap, and the notion of what "is" or "isn't" a distribution is academic. Are there scenarios where people are legitimately taking profit sharing distros that are not, under the spirit of the tax code, wages? I'm sure there are. Do those scenarios really account for a significant fraction of the cases where people take a "wage/distro split"? I really doubt it. My casual sense of it is, people that take a "wage/distro split" feel entitled to pay lower taxes simply because they've finagled themselves into an S-Corp.