5 ms·

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 ow

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".
    - brianwawok 9y ago
      So the average programmer US wise makes something like 90k I believe (haven't checked in a few years). You are saying if you ran a 1 man SAAS app and made 200k in a year, you would w2 yourself for 30k and take a 170k dividend? I am not sure my accountant would like this plan. Taking say that 90k or 100k might be plausible, but 30% of the average wage? (And at the 90k point.. FICA goes away past 110k anyway, so the savings is fairly minimal)
      - tmbeihl 9y ago
        I think what he means is that your pay must be within 30% of the average wage. So you could likely pay yourself between 63k and 113k if the average wage was 90k.
        jermaustin1 9y ago
        Actually, the $30k COULD be reasonable if you are at that point only being a marketer. If you go on indeed or glassdoor, search what ever your main task is, and screen grab that average salary. Keep searching until you find one that works best for you. Change your salary with each task by being an hourly w2 employee with different charge codes based on the task. Just make sure you track what work you are doing. (IANAL/A)
      - deleted 9y ago
        [deleted]
      - jjeaff 9y ago
        More like $60k. But no, your accountant will not go for anything even remotely risky. Accountants are notoriously conservative. No accountant is going to stick their neck out for their average customer. You have to pay the big bucks for the guys willing to push the envelope. And that's not be ause they are better, it's because they have to make more money to offset the risk to their career.
      - ThrustVectoring 9y ago
        I'd set up a solo-401k and take 20% of that ($40k) as a profit-sharing retirement plan between the "employer" and "employee". Add in a $18k elective contribution out of your W-2 wages as well. IIRC there's a maximum total contribution of $56k so this doesn't work particularly well past the $180k net profit point or so. I'm seriously considering moonlighting as a freelancer just to get access to this kind of setup. Of course, my daytime employer not having a 401k makes a big difference - with the combination of the profit-sharing and employee elective contribution, the first $22.5k annually would go directly into a tax-deferred retirement account. Partner up with different people to run unrelated businesses, and you can set up a profit-sharing plan with each to get separate "20% up to $56k/yr" buckets. Anyhow, I'm kind of rambling. My point is that when you wear both the "employer" and "employee" hat, there's some really good options that open up that most employers don't offer because it's a wealth-transfer from employer to employee.
gnicholas 9y ago
Working as a contractor for your wholly-owned company would never pass muster with the IRS. You might be able to avoid audit for a little while, but when this catches up to you it will be a huge mess. They would recast the transactions (they can do this) and you'd end up owing a ton of tax and penalties. Source: I'm a (former) tax lawyer.
- theodorton 9y ago
  So you're not allowed to be self-employed by a corporation that you own yourself in the US? I thought this was pretty normal practice for contractors, especially in IT. I own my own company where I do contracting work for clients and the income goes to the company. I might have misunderstood or phrased myself badly above.
  - Analemma_ 9y ago
    You’re allowed to be employed by the company you own as an employee, but not as a contractor. You’re a “contractor” from the perspective of your clients, but to your own company (if you made one), you’re an employee.
- jsight 9y ago
  I think that he meant that you would be an employee of the corporation. The corporation would then be the contractor for someone else. I'm still not convinced that this works, but that is how I read it.
- ryanmarsh 9y ago
  That's why you pay yourself a small, but not alarmingly small, salary W2 and take the rest on your K1 or such.
  - gnicholas 9y ago
    The IRS routinely audits people for not paying themselves a market salary in order to shift income to another category. So in playing this game, you have to factor in the likelihood of audit, cost of defense, and cost of penalties and interest that could be assessed.
ckinnan 9y ago
Corporations have to pay quarterly estimated taxes.
- thomas_howland 9y ago
  So do most contractors.
  - jermaustin1 9y ago
    So do most very wealthy people. Rule of thumb (possibly law?): if you will owe more than $1000 at tax time, you have to file quarterly.

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".
  - brianwawok 9y ago
    So the average programmer US wise makes something like 90k I believe (haven't checked in a few years). You are saying if you ran a 1 man SAAS app and made 200k in a year, you would w2 yourself for 30k and take a 170k dividend? I am not sure my accountant would like this plan. Taking say that 90k or 100k might be plausible, but 30% of the average wage? (And at the 90k point.. FICA goes away past 110k anyway, so the savings is fairly minimal)
    - tmbeihl 9y ago
      I think what he means is that your pay must be within 30% of the average wage. So you could likely pay yourself between 63k and 113k if the average wage was 90k.
      - jermaustin1 9y ago
        Actually, the $30k COULD be reasonable if you are at that point only being a marketer. If you go on indeed or glassdoor, search what ever your main task is, and screen grab that average salary. Keep searching until you find one that works best for you. Change your salary with each task by being an hourly w2 employee with different charge codes based on the task. Just make sure you track what work you are doing. (IANAL/A)
    - deleted 9y ago
      [deleted]
    - jjeaff 9y ago
      More like $60k. But no, your accountant will not go for anything even remotely risky. Accountants are notoriously conservative. No accountant is going to stick their neck out for their average customer. You have to pay the big bucks for the guys willing to push the envelope. And that's not be ause they are better, it's because they have to make more money to offset the risk to their career.
    - ThrustVectoring 9y ago
      I'd set up a solo-401k and take 20% of that ($40k) as a profit-sharing retirement plan between the "employer" and "employee". Add in a $18k elective contribution out of your W-2 wages as well. IIRC there's a maximum total contribution of $56k so this doesn't work particularly well past the $180k net profit point or so. I'm seriously considering moonlighting as a freelancer just to get access to this kind of setup. Of course, my daytime employer not having a 401k makes a big difference - with the combination of the profit-sharing and employee elective contribution, the first $22.5k annually would go directly into a tax-deferred retirement account. Partner up with different people to run unrelated businesses, and you can set up a profit-sharing plan with each to get separate "20% up to $56k/yr" buckets. Anyhow, I'm kind of rambling. My point is that when you wear both the "employer" and "employee" hat, there's some really good options that open up that most employers don't offer because it's a wealth-transfer from employer to employee.

gnicholas 9y ago

Working as a contractor for your wholly-owned company would never pass muster with the IRS. You might be able to avoid audit for a little while, but when this catches up to you it will be a huge mess. They would recast the transactions (they can do this) and you'd end up owing a ton of tax and penalties. Source: I'm a (former) tax lawyer.

theodorton 9y ago
So you're not allowed to be self-employed by a corporation that you own yourself in the US? I thought this was pretty normal practice for contractors, especially in IT. I own my own company where I do contracting work for clients and the income goes to the company. I might have misunderstood or phrased myself badly above.
- Analemma_ 9y ago
  You’re allowed to be employed by the company you own as an employee, but not as a contractor. You’re a “contractor” from the perspective of your clients, but to your own company (if you made one), you’re an employee.
jsight 9y ago
I think that he meant that you would be an employee of the corporation. The corporation would then be the contractor for someone else. I'm still not convinced that this works, but that is how I read it.
ryanmarsh 9y ago
That's why you pay yourself a small, but not alarmingly small, salary W2 and take the rest on your K1 or such.
- gnicholas 9y ago
  The IRS routinely audits people for not paying themselves a market salary in order to shift income to another category. So in playing this game, you have to factor in the likelihood of audit, cost of defense, and cost of penalties and interest that could be assessed.

ckinnan 9y ago

Corporations have to pay quarterly estimated taxes.

thomas_howland 9y ago
So do most contractors.
- jermaustin1 9y ago
  So do most very wealthy people. Rule of thumb (possibly law?): if you will owe more than $1000 at tax time, you have to file quarterly.