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If I’m reading this properly I’ve seen this dynamic countless times in middle market firms - founder/owner/CEO’s paying themselves $150k/year salary at companys

If I’m reading this properly I’ve seen this dynamic countless times in middle market firms - founder/owner/CEO’s paying themselves $150k/year salary at companys doing $5m-$30m EBITDA. I.e. they pay themselves way below market because six vs half a dozen and optically having a lower salary is better.

delinka 9y ago
Not to mention that "salary" is taxed higher than "capital gains." Paying oneself a "reasonable salary" (according to the IRS; and such that one is paying full tax on that salary) and taking other distributions at lower capital gains tax rates legally reduces the tax bill and lets one keep more money in one's own pocket. You, too, can benefit from this scheme. Set up your S-Corp, stop being someone else's employee, and play along in the tax reduction shell game!
- rbcgerard 9y ago
  Sorry, it does not work like that (through 2017 anyway). If you own a pass through (s-Corp/LLC etc) distributions are untaxed, however all earnings of the firm are taxed at your personal tax rate. It’s not to say that wage and firm earnings are exactly the same, but pretty close.
  - GFischer 9y ago
    There are a LOT of ways to game taxes if you're either an S-Corp or a C-Corp (without going into stuff like overseas, disguising personal expenses as business expenses, and other classics), and the original papeer has a very telling graph showing it (ok, so it's less than a 5% reduction, but it's still a tax break). See the original PDF, page 72 "The marginal tax rate falls at the top because active S-corporation income is a larger share of total labor income at the top but is not subject to the 2.9% Medicare tax and 0.9% ACA Additional Medicare Tax. See Section 7 for additional details." http://faculty.chicagobooth.edu/owen.zidar/research/papers/capitalists.pdf http://faculty.chicagobooth.edu/owen.zidar/research/papers/c... Not to mention they're going to get WAY bigger under Trump: http://www.latimes.com/business/hiltzik/la-fi-hiltzik-pass-through-trump-tax-20171004-story.html http://www.latimes.com/business/hiltzik/la-fi-hiltzik-pass-t... Edit: as meritt posted, it's going to be like 20% (!!!), not taking into account the other tricks.
    - rbcgerard 9y ago
      Yup - I was merely pointing out that there is not some massive tax arbitrage (pre-2017 and in the context of the data). For example: Let's say a firm has $5m in net income before paying CEO salary, and let's say that the market rate for such a position is $1m/year, and the firm is 100% owned by the CEO. Let's say the company is in a high tax state (NYC? SF?). Now let's take two scenarios, one where the owner operator pays herself $150k in salary and the other where she pays herself $1m in salary. If the non salary income is taxed at ~45% and the salary income ~50% then her effective tax rate is 45.2% vs 46.0% for a ~$43k tax savings ($2.257m vs $2.300m in tax liability). This tax benefit is definitely going to lead people to want to characterize less income as salary, but in the grand scheme of things is not some wholesale tax doge as was previously implied...
- meritt 9y ago
  Prior to 2018 at the federal level, this strategy only saves on payroll taxes, which is effectively just the medicare portion: ~2.9% - 3.8% of tax savings. In 2018 however pass-through income gets to take a very significant 20% deduction off the top. Whatever findings they uncovered in that study are going to accelerate very rapidly under the new tax plan.
  - mark212 9y ago
    Not true. The new tax law excludes businesses that are labor-based (eg law firms, doctors, tax advisors). Precisely the folks described in the paper as the working 1%. It’s really only a benefit to people who earn income from passive real estate investments — like Trump and Sen. Corker in a coincidence that will shock precisely no one.

delinka 9y ago

Not to mention that "salary" is taxed higher than "capital gains." Paying oneself a "reasonable salary" (according to the IRS; and such that one is paying full tax on that salary) and taking other distributions at lower capital gains tax rates legally reduces the tax bill and lets one keep more money in one's own pocket. You, too, can benefit from this scheme. Set up your S-Corp, stop being someone else's employee, and play along in the tax reduction shell game!

rbcgerard 9y ago
Sorry, it does not work like that (through 2017 anyway). If you own a pass through (s-Corp/LLC etc) distributions are untaxed, however all earnings of the firm are taxed at your personal tax rate. It’s not to say that wage and firm earnings are exactly the same, but pretty close.
- GFischer 9y ago
  There are a LOT of ways to game taxes if you're either an S-Corp or a C-Corp (without going into stuff like overseas, disguising personal expenses as business expenses, and other classics), and the original papeer has a very telling graph showing it (ok, so it's less than a 5% reduction, but it's still a tax break). See the original PDF, page 72 "The marginal tax rate falls at the top because active S-corporation income is a larger share of total labor income at the top but is not subject to the 2.9% Medicare tax and 0.9% ACA Additional Medicare Tax. See Section 7 for additional details." http://faculty.chicagobooth.edu/owen.zidar/research/papers/capitalists.pdf http://faculty.chicagobooth.edu/owen.zidar/research/papers/c... Not to mention they're going to get WAY bigger under Trump: http://www.latimes.com/business/hiltzik/la-fi-hiltzik-pass-through-trump-tax-20171004-story.html http://www.latimes.com/business/hiltzik/la-fi-hiltzik-pass-t... Edit: as meritt posted, it's going to be like 20% (!!!), not taking into account the other tricks.
  - rbcgerard 9y ago
    Yup - I was merely pointing out that there is not some massive tax arbitrage (pre-2017 and in the context of the data). For example: Let's say a firm has $5m in net income before paying CEO salary, and let's say that the market rate for such a position is $1m/year, and the firm is 100% owned by the CEO. Let's say the company is in a high tax state (NYC? SF?). Now let's take two scenarios, one where the owner operator pays herself $150k in salary and the other where she pays herself $1m in salary. If the non salary income is taxed at ~45% and the salary income ~50% then her effective tax rate is 45.2% vs 46.0% for a ~$43k tax savings ($2.257m vs $2.300m in tax liability). This tax benefit is definitely going to lead people to want to characterize less income as salary, but in the grand scheme of things is not some wholesale tax doge as was previously implied...
meritt 9y ago
Prior to 2018 at the federal level, this strategy only saves on payroll taxes, which is effectively just the medicare portion: ~2.9% - 3.8% of tax savings. In 2018 however pass-through income gets to take a very significant 20% deduction off the top. Whatever findings they uncovered in that study are going to accelerate very rapidly under the new tax plan.
- mark212 9y ago
  Not true. The new tax law excludes businesses that are labor-based (eg law firms, doctors, tax advisors). Precisely the folks described in the paper as the working 1%. It’s really only a benefit to people who earn income from passive real estate investments — like Trump and Sen. Corker in a coincidence that will shock precisely no one.