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> Americans in the top 1 percent, and especially the top 0.1 percent, have seen their wealth and income multiply in recent decades as the rest of the country’s

> Americans in the top 1 percent, and especially the top 0.1 percent, have seen their wealth and income multiply in recent decades as the rest of the country’s share of the economic pie shrank. Since 2000, a recent study found, the top 1 percent have made those gains almost entirely on income from capital, especially corporate stock—not on labor income. One reason may be the financial options of the wealthy: Business owners can lower their tax bills by paying themselves in dividends rather than in salary, for example. I've written a few times about how the different tax rates on income, vs dividends vs interest income vs capital gains, and even business vs personal tax rates all work together to ensure the 1% come out ahead of the average income earning individual. I think I was 25 when I incorporated my first corporation, not because I was a startup founder, but to reduce my taxes. I'll bet if you look around at the most wealthy people you know, almost all will have their own corporation or two. I mean, just the fact that people pay taxes and then expense out of after tax money and corporations pay expenses and then tax on whats left should be enough to illustrate how corporations keep the rich ahead of the salaried population. It can get worse as corporations can change their tax year. This means if you are someone who gets a large bonus at the end of the calendar year you can shelter the tax on it for an entire year. So you can have someone who earns a $100,000 salary and gets a $500,000 bonus on December 31st. The bonus goes into the corporation and has a full year until November 30th before the tax is due. If you invest the bonus and earn 20% by next November you have earned enough money back to cover the corporate taxes due vs the salaried employee who pays the full 40ish% tax rate on the $500,000 bonus. Now, you'll have to eventually pay dividends to take the money out of the company but I think I've shown enough to prove just how far ahead the person with the corporation comes out ahead of the average person. Until the tax law changes, smart people have corporations, the 99% don't.

bryanlarsen 9y ago
They're currently trying to close a couple of those loopholes here in Canada, and it's surprising how much traction the complaints against the reforms are getting. The opponents are claiming that the reforms are going to devastate family doctors and family farms. The complaints are mostly bogus, but people don't understand tax law so are vulnerable to an emotional plea.
- danudey 9y ago
  As someone who works at a startup and has interacted with many others, there is some merit to the claims. I agree that these loopholes should be closed and the tax system reformed, but I think we should be careful to do it in such a way that doesn't negatively affect e.g. companies like the one I work for, which went from three people to 70 and millions in revenue in just a few years. Especially as Vancouver is trying to build its tech and entrepreneurial ecosystem, it's important to ensure that we aren't driving away or hindering small businesses to grow while also not letting huge corporations like TD, Telus, or Apple get the biggest benefits from the tax system the more money they have.
  - aaronblohowiak 9y ago
    Since you pay taxes on profits and not revenue how would they impede growth? Money reinvested is tax free.
    - IncRnd 9y ago
      Money is reinvested tax free for a c corp. That is not always true.
  - seanp2k2 9y ago
    https://mobile.nytimes.com/2012/04/29/business/apples-tax-strategy-aims-at-low-tax-states-and-nations.html https://mobile.nytimes.com/2012/04/29/business/apples-tax-st... https://motherboard.vice.com/en_us/article/pga739/apple-avoids-60-billion-in-taxes-by-keeping-money-overseas-report-says https://motherboard.vice.com/en_us/article/pga739/apple-avoi... should have the loopholes which allow them closed.
  - bryanlarsen 9y ago
    Can you expand? Which particular change would affect your company? In no way should any of those changes affect a fast growing company. I doubt investors would be very happy if your founder was giving unearned dividends to family members. Your founder shouldn't be locking up capital in long term passive investments. Your founder probably isn't particularly worried about evading estate taxes.
vasilipupkin 9y ago
I am confused. If you put your bonus into a corporation, you will have to pay tax twice, the corporate tax and your personal tax. And if your corporation is an LLC, it all flows through to your personal taxes anyway. So, I don't see how you shelter this just by putting into a corporation.
- theodorton 9y ago
  Salaries (and bonuses) are considered expenses for the company and will be tax deductible. I believe the example was that you may as a contractor (with your own company) receive a bonus to your corporation and be able to offset taxes for another 11 months compared to having the bonus paid out personally.
  - vasilipupkin 9y ago
    yes, but if you have your own corporation, unless it's an LLC, then you will have to pay corporate tax on that income in addition to personal income. And if it's an LLC, there is no difference.
    - alexlongterm 9y ago
      ^^^ this. In fact in the US the IRS will flag abnormally high salaries for small businesses (millions per individual) if no or very few dividends are paid out because income tax is less favorable to the government in the total amount the IRS receives when looking at multi million dollar salaries. Beyond the first $110kish FICA stops making a dent as social security caps out. I'm sure there are possible loopholes for very wealthy individuals but this article doesn't detail them and I'm not familiar with them either. This is the opposite of other places like Sweden where high income tax and low business taxes make dividends very favorable, and the tax authorities there will question paying dividends at too low of income levels.
      - jermaustin1 9y ago
        People often forget about S-Corps. As the owner you W-2 yourself, then what is "left over" is a dividend. Since an S-Corp is a pass-through entity, you don't pay corporate taxes, and aren't getring the C-Corp double tax on your dividends. On the dividend, you don't end up paying toward FICA. Effectively saving you up to 15.3%. IRS rules stipulate you have to be paid a "reasonable" compensation, which most accountants I've talked with define as within 30% of average wage for your "profession".
dougk16 9y ago
Could you link to any "for dummies"-type resources that show how you can incorporate and use that corporation to reduce your taxes? Something that would hopefully be applicable to your typical middle-class homeowner in their 30s with young kids and a 9-5 making enough to get by but is looking for any edge they can find? Edit: (in the US)
- nsnick 9y ago
  Start by getting paid on a 1099 instead of a w2
  - ckinnan 9y ago
    Which means immediately higher taxes because you get to pay the employer side of payroll taxes, plus no pretax benefits like health care and no vacation or other untaxed benefits.
    - tdfx 9y ago
      You can elect to have your LLC taxed as an S-corp to avoid some of the self-employment tax [1]. 1. https://www.thebalance.com/what-is-a-reasonable-salary-for-an-s-corporation-officer-397939 https://www.thebalance.com/what-is-a-reasonable-salary-for-a...
    - hippich 9y ago
      this applies to the certain degree.. if you make less than FICA threshold - yes, you are right. If you make more from multiple contracts/jobs - it is more efficient to be paid as contractor (assuming that client will pay you your employee taxes share, which would otherwise be paid by employer in case of W-2 employment)
  - prostoalex 9y ago
    I wonder then why those Uber drivers so adamantly oppose a path to riches.
    - 9y ago
snarf21 9y ago
This is very true. The hard part is we need corporations to create jobs, provide housing and finance company growth. You get what you reward and optimize for. The problem is that we aren't optimizing for the right things. I think we need to drop things such as "like kind exchange" and find new ways for people to use their retirement to start business but with tax forgiveness if it fails that could be used to refund retirement.
- notacoward 9y ago
  > we need corporations to create jobs Not really. Sure, we need some form of association to hold property, and sometimes limited liability. Does it need to be the kind of corporations we have now, able to exercise all the rights of people but not taxed or held accountable like people? Nope. A deep reform in all of the laws defining what "corporation" means, and not just tax laws, is overdue.
SilasX 9y ago
>I've written a few times about how the different tax rates on income, vs dividends vs interest income vs capital gains, and even business vs personal tax rates all work together to ensure the 1% come out ahead of the average income earning individual. I don't think that's right. If you look at the dividends in isolation, it looks like a low tax rate. But if you ask "what's the tax rate on capital income?", then you have to adjust for the fact that, before the capital can pay out anything, the investment must pay taxes on profits (35%), taxes on dividends (15%), and taxes on undistributed gains when selling (capital gains, 15-35%). So, trace out the taxes on a $100 investment that miraculously pays for itself and throws off $200 in profits on top and pays $50 as a dividend. I exit the position. How much was I taxed at? $200 profits -> $70 in corporate income tax. (35%) $50 dividend -> $7.5 dividend tax. (15%) $115 capital gain (it retained $115 of the $200 profits, raising its market price by that much) -> $17.25 capital gains tax (15%) Total investment (capital) income: $200. Total capital income tax: $94.75 (17.25 + 7.5 + 70) Total capital income tax rate: 47.3% (94.75/200). (That understates it since you can't deduct inflation.) And keep in mind, investment is believed to have positive externalities!
- JamesBarney 9y ago
  That's the nominal corporate tax rate not the effective tax rate which is closer to 18.6%. Also you're dividing by 200 when you made 250. My calculation with those two corrections give 27.6% which is lower 13% 20018.6% + 200(1-18.6%)15% + 5015% 37.2 + 24.42 + 7.5 = 69.12 / 250 = 27.6% Marginal Tax rate for 38k-90k = 40.8% 90k-110k = 43.8% 110k - 190k - 28% 190k- 420k - 33%
  - SilasX 9y ago
    >That's the nominal corporate tax rate not the effective tax rate which is closer to 18.6%. That's with journalist accounting where they reject valid expenses to "prove" that the tax rate is lower. >Also you're dividing by 200 when you made 250. No -- the investment paid for itself (the 100) then earned 200 (the amount above what I invested), then paid 50 out of that as a dividend. It looks strange because it doesn't make sense to tax for distributing the already-taxed profits, and yet people still think the 15% tax on the distributed part of the taxed profit is too low(!), specifically because they ignore the taxes it already had to pay -- that was the point.
aecorredor 9y ago
Ok, I'm not getting something here, how does incorporating a corporation at age 25 reduce your taxes if you're still a salaried worker in another company for example?
- URSpider94 9y ago
  It doesn't. Incorporation only helps if you have a flexible work arrangement and can shift income from salary into consulting fees or other payments to your Corp.
deleted 9y ago
[deleted]
xienze 9y ago
> If you invest the bonus and earn 20% by next November So simple! And I imagine if there were a reliable way to earn 20% in a year even regular Joes would be taking advantage.
deleted 9y ago
[deleted]
erentz 9y ago
> So you can have someone who earns a $100,000 salary and gets a $500,000 bonus on December 31st. The bonus goes into the corporation and has a full year until November 30th before the tax is due. How do you put "the bonus into the corporation"?

bryanlarsen 9y ago

They're currently trying to close a couple of those loopholes here in Canada, and it's surprising how much traction the complaints against the reforms are getting. The opponents are claiming that the reforms are going to devastate family doctors and family farms. The complaints are mostly bogus, but people don't understand tax law so are vulnerable to an emotional plea.

danudey 9y ago
As someone who works at a startup and has interacted with many others, there is some merit to the claims. I agree that these loopholes should be closed and the tax system reformed, but I think we should be careful to do it in such a way that doesn't negatively affect e.g. companies like the one I work for, which went from three people to 70 and millions in revenue in just a few years. Especially as Vancouver is trying to build its tech and entrepreneurial ecosystem, it's important to ensure that we aren't driving away or hindering small businesses to grow while also not letting huge corporations like TD, Telus, or Apple get the biggest benefits from the tax system the more money they have.
- aaronblohowiak 9y ago
  Since you pay taxes on profits and not revenue how would they impede growth? Money reinvested is tax free.
  - IncRnd 9y ago
    Money is reinvested tax free for a c corp. That is not always true.
- seanp2k2 9y ago
  https://mobile.nytimes.com/2012/04/29/business/apples-tax-strategy-aims-at-low-tax-states-and-nations.html https://mobile.nytimes.com/2012/04/29/business/apples-tax-st... https://motherboard.vice.com/en_us/article/pga739/apple-avoids-60-billion-in-taxes-by-keeping-money-overseas-report-says https://motherboard.vice.com/en_us/article/pga739/apple-avoi... should have the loopholes which allow them closed.
- bryanlarsen 9y ago
  Can you expand? Which particular change would affect your company? In no way should any of those changes affect a fast growing company. I doubt investors would be very happy if your founder was giving unearned dividends to family members. Your founder shouldn't be locking up capital in long term passive investments. Your founder probably isn't particularly worried about evading estate taxes.

vasilipupkin 9y ago

I am confused. If you put your bonus into a corporation, you will have to pay tax twice, the corporate tax and your personal tax. And if your corporation is an LLC, it all flows through to your personal taxes anyway. So, I don't see how you shelter this just by putting into a corporation.

theodorton 9y ago
Salaries (and bonuses) are considered expenses for the company and will be tax deductible. I believe the example was that you may as a contractor (with your own company) receive a bonus to your corporation and be able to offset taxes for another 11 months compared to having the bonus paid out personally.
- vasilipupkin 9y ago
  yes, but if you have your own corporation, unless it's an LLC, then you will have to pay corporate tax on that income in addition to personal income. And if it's an LLC, there is no difference.
  - alexlongterm 9y ago
    ^^^ this. In fact in the US the IRS will flag abnormally high salaries for small businesses (millions per individual) if no or very few dividends are paid out because income tax is less favorable to the government in the total amount the IRS receives when looking at multi million dollar salaries. Beyond the first $110kish FICA stops making a dent as social security caps out. I'm sure there are possible loopholes for very wealthy individuals but this article doesn't detail them and I'm not familiar with them either. This is the opposite of other places like Sweden where high income tax and low business taxes make dividends very favorable, and the tax authorities there will question paying dividends at too low of income levels.
    - jermaustin1 9y ago
      People often forget about S-Corps. As the owner you W-2 yourself, then what is "left over" is a dividend. Since an S-Corp is a pass-through entity, you don't pay corporate taxes, and aren't getring the C-Corp double tax on your dividends. On the dividend, you don't end up paying toward FICA. Effectively saving you up to 15.3%. IRS rules stipulate you have to be paid a "reasonable" compensation, which most accountants I've talked with define as within 30% of average wage for your "profession".

dougk16 9y ago

Could you link to any "for dummies"-type resources that show how you can incorporate and use that corporation to reduce your taxes? Something that would hopefully be applicable to your typical middle-class homeowner in their 30s with young kids and a 9-5 making enough to get by but is looking for any edge they can find? Edit: (in the US)

nsnick 9y ago
Start by getting paid on a 1099 instead of a w2
- ckinnan 9y ago
  Which means immediately higher taxes because you get to pay the employer side of payroll taxes, plus no pretax benefits like health care and no vacation or other untaxed benefits.
  - tdfx 9y ago
    You can elect to have your LLC taxed as an S-corp to avoid some of the self-employment tax [1]. 1. https://www.thebalance.com/what-is-a-reasonable-salary-for-an-s-corporation-officer-397939 https://www.thebalance.com/what-is-a-reasonable-salary-for-a...
  - hippich 9y ago
    this applies to the certain degree.. if you make less than FICA threshold - yes, you are right. If you make more from multiple contracts/jobs - it is more efficient to be paid as contractor (assuming that client will pay you your employee taxes share, which would otherwise be paid by employer in case of W-2 employment)
- prostoalex 9y ago
  I wonder then why those Uber drivers so adamantly oppose a path to riches.
  - 9y ago

snarf21 9y ago

This is very true. The hard part is we need corporations to create jobs, provide housing and finance company growth. You get what you reward and optimize for. The problem is that we aren't optimizing for the right things. I think we need to drop things such as "like kind exchange" and find new ways for people to use their retirement to start business but with tax forgiveness if it fails that could be used to refund retirement.

notacoward 9y ago
> we need corporations to create jobs Not really. Sure, we need some form of association to hold property, and sometimes limited liability. Does it need to be the kind of corporations we have now, able to exercise all the rights of people but not taxed or held accountable like people? Nope. A deep reform in all of the laws defining what "corporation" means, and not just tax laws, is overdue.

SilasX 9y ago

>I've written a few times about how the different tax rates on income, vs dividends vs interest income vs capital gains, and even business vs personal tax rates all work together to ensure the 1% come out ahead of the average income earning individual. I don't think that's right. If you look at the dividends in isolation, it looks like a low tax rate. But if you ask "what's the tax rate on capital income?", then you have to adjust for the fact that, before the capital can pay out anything, the investment must pay taxes on profits (35%), taxes on dividends (15%), and taxes on undistributed gains when selling (capital gains, 15-35%). So, trace out the taxes on a $100 investment that miraculously pays for itself and throws off $200 in profits on top and pays $50 as a dividend. I exit the position. How much was I taxed at? $200 profits -> $70 in corporate income tax. (35%) $50 dividend -> $7.5 dividend tax. (15%) $115 capital gain (it retained $115 of the $200 profits, raising its market price by that much) -> $17.25 capital gains tax (15%) Total investment (capital) income: $200. Total capital income tax: $94.75 (17.25 + 7.5 + 70) Total capital income tax rate: 47.3% (94.75/200). (That understates it since you can't deduct inflation.) And keep in mind, investment is believed to have positive externalities!

JamesBarney 9y ago
That's the nominal corporate tax rate not the effective tax rate which is closer to 18.6%. Also you're dividing by 200 when you made 250. My calculation with those two corrections give 27.6% which is lower 13% 20018.6% + 200(1-18.6%)15% + 5015% 37.2 + 24.42 + 7.5 = 69.12 / 250 = 27.6% Marginal Tax rate for 38k-90k = 40.8% 90k-110k = 43.8% 110k - 190k - 28% 190k- 420k - 33%
- SilasX 9y ago
  >That's the nominal corporate tax rate not the effective tax rate which is closer to 18.6%. That's with journalist accounting where they reject valid expenses to "prove" that the tax rate is lower. >Also you're dividing by 200 when you made 250. No -- the investment paid for itself (the 100) then earned 200 (the amount above what I invested), then paid 50 out of that as a dividend. It looks strange because it doesn't make sense to tax for distributing the already-taxed profits, and yet people still think the 15% tax on the distributed part of the taxed profit is too low(!), specifically because they ignore the taxes it already had to pay -- that was the point.

aecorredor 9y ago

Ok, I'm not getting something here, how does incorporating a corporation at age 25 reduce your taxes if you're still a salaried worker in another company for example?

URSpider94 9y ago
It doesn't. Incorporation only helps if you have a flexible work arrangement and can shift income from salary into consulting fees or other payments to your Corp.

deleted 9y ago

[deleted]

xienze 9y ago

> If you invest the bonus and earn 20% by next November So simple! And I imagine if there were a reliable way to earn 20% in a year even regular Joes would be taking advantage.

deleted 9y ago

[deleted]

erentz 9y ago

> So you can have someone who earns a $100,000 salary and gets a $500,000 bonus on December 31st. The bonus goes into the corporation and has a full year until November 30th before the tax is due. How do you put "the bonus into the corporation"?