4 ms·

You can start an s-Corp, and as an employee of the Corp, you pay yourself a reasonable salary. Say 40% of gross (you'll pay social security, unemployment, etc a

by aantix 5y ago

You can start an s-Corp, and as an employee of the Corp, you pay yourself a reasonable salary. Say 40% of gross (you'll pay social security, unemployment, etc as an employee drawing a salary). Then as the owner of the Corp, your compensation gets distributed as a dividend. With a dividend, you don't pay taxes on FICA. You'll save ~15% in taxes. You could do this with a simple s-Corp created with LegalZoom. $400. Lyft drivers can drive as an S-Corp if they wish. It’s not that exclusive.

lotsofpulp 5y ago
75% of households earn under $120k per year. With max 401k, HSA, IRA, standard deduction, and a couple other easy to use deductions, is it worth it for them to go through all that trouble?
llbeansandrice 5y ago
If you're W-2 it really doesn't matter at all though yeah? And if the money you're making isn't all that much saving 15% could easily be not worth the trouble of doing it. Or add up to even $400.
zrail 5y ago
The FICA net benefit window for s-corps is pretty narrow in the face of the 199A deduction. I haven't run the numbers recently but s-corp doesn't make sense until you hit something like $100k gross income to start with because of the tax prep fees and then social security tax stops at $160k-ish of W2 income. The 199A deduction lets most sole proprietorships deduct 20% of net income. S-corps can only deduct 20% of payroll. There are certainly other benefits to operating as an S-Corp (using an HRA and HSA in the same tax year is a particular favorite) but the income/fica benefits are overstated these days.
- aantix 5y ago
  > HRA and HSA in the same tax year Curious, what's the benefit there?
  - zrail 5y ago
    An HRA lets you deduct 100% of qualified medical expenses by paying for them through your company. An HSA lets you deduct up to $7200 for future medical expenses. In 2016 we deducted something like $40k off of our income between premiums, deductibles and copays (HRA) and maxing our HSA.
- aantix 5y ago
  Was just working through this calculator https://proconnect.intuit.com/tax-reform/entity-selection-calculator/ https://proconnect.intuit.com/tax-reform/entity-selection-ca... It does appear that a Schedule C ends up with more cash after taxes, when factoring in the 199a. I need to revisit my assumptions.
lifeformed 5y ago
Well, to benefit from that, you also have to make more money than the reasonable salary every year, which a driver probably won't be doing by much.
PragmaticPulp 5y ago
> You can start an s-Corp, as an employee of the Corp, pay yourself a “reasonable” salary on say 40% of the gross (pay social security, unemployment, etc). > As the owner of the Corp, pay the rest of the comp as a dividend. Thus avoiding fica taxes. Sounds good in theory, but if you're operating as a consultant, charging clients one rate, and then only claiming 40% of that is your "reasonable salary" then the IRS is likely to see right through your scheme. They can, and will, send the S-Corp a bill for unpaid taxes when they recharacterize those "dividend payments" as salary for you. > You could do this with a simple s-Corp created with LegalZoom. $400. Starting an S-Corp is only the beginning. S-Corps are legally required to do a lot of record keeping, paperwork, filing, and even hold shareholder meetings with recorded minutes. Yes, even if you're the only shareholder and you're meeting with yourself. Some number of people do abuse the S-Corp status to dodge taxes by paying themselves in dividends with a token salary, but it's not an easy or risk-free tax dodge. The IRS may be understaffed for audits (for now) but they're not dumb when they actually start looking into these things.
- derefr 5y ago
  > if you're operating as a consultant, charging clients one rate, and then only claiming 40% of that is your "reasonable salary" Why would that be off? 40% sounds exactly right; large consultancies pay their consultants 40% (or less!) of what they’re charging clients for said consultants’ time. Maybe what you’re more concerned about here would be giving giving a 40%-of-revenue salary plus a 60%-of-revenue dividend. But the dividend wouldn’t be 60%. You, as the S-Corp, would be paying into all the regular withholding stuff companies have to pay into on behalf of their employees (social security, etc.). Ever heard the phrase “employing someone at a given salary, costs ≥200% of that salary”? It’s not far off.
- aantix 5y ago
  Your FUD isn't needed. This is a perfectly reasonable approach. You're both an employee and an owner of the Corp. And are entitled to benefits on each side. Dividend distributions are a common means of compensation to share holders. You are an investor in the company. Your usage of "scheme" is interesting and probably one of the many reasons why people like Bezos bring up so much vitriol when discussing taxes. I see this approach as a perfectly legitimate, thoughtful structure to the issue of division between employee and ownership compensation. You see it as a "scheme".
ModernMech 5y ago
It is also more work though. An S-Corp needs to have shareholder meetings, corporate bylaws, keep meetings minutes, final annual reports, requires a board of directors, and you have to be a US citizen/resident. These are all doable of course, but you have to make sure it's worth the tradeoff. The richer you are, the easier it is to hire someone to do all of this extra stuff for you.
gamblor956 5y ago
When I worked in a firm (doing tax law), I loved seeing posts like this online, because the idiots that followed this advice provided a steady stream of clients needing help with their IRS audits. If someone actually does follow your advice they will be audited, they will owe penalties and back taxes to the IRS. This is also known as a "false tax return", and so the statute of limitations never expires and the IRS has until the end of time to audit the understated returns.

by aantix 5y ago

lotsofpulp 5y ago

75% of households earn under $120k per year. With max 401k, HSA, IRA, standard deduction, and a couple other easy to use deductions, is it worth it for them to go through all that trouble?

llbeansandrice 5y ago

If you're W-2 it really doesn't matter at all though yeah? And if the money you're making isn't all that much saving 15% could easily be not worth the trouble of doing it. Or add up to even $400.

zrail 5y ago

The FICA net benefit window for s-corps is pretty narrow in the face of the 199A deduction. I haven't run the numbers recently but s-corp doesn't make sense until you hit something like $100k gross income to start with because of the tax prep fees and then social security tax stops at $160k-ish of W2 income. The 199A deduction lets most sole proprietorships deduct 20% of net income. S-corps can only deduct 20% of payroll. There are certainly other benefits to operating as an S-Corp (using an HRA and HSA in the same tax year is a particular favorite) but the income/fica benefits are overstated these days.

aantix 5y ago
> HRA and HSA in the same tax year Curious, what's the benefit there?
- zrail 5y ago
  An HRA lets you deduct 100% of qualified medical expenses by paying for them through your company. An HSA lets you deduct up to $7200 for future medical expenses. In 2016 we deducted something like $40k off of our income between premiums, deductibles and copays (HRA) and maxing our HSA.
aantix 5y ago
Was just working through this calculator https://proconnect.intuit.com/tax-reform/entity-selection-calculator/ https://proconnect.intuit.com/tax-reform/entity-selection-ca... It does appear that a Schedule C ends up with more cash after taxes, when factoring in the 199a. I need to revisit my assumptions.

lifeformed 5y ago

Well, to benefit from that, you also have to make more money than the reasonable salary every year, which a driver probably won't be doing by much.

PragmaticPulp 5y ago

> You can start an s-Corp, as an employee of the Corp, pay yourself a “reasonable” salary on say 40% of the gross (pay social security, unemployment, etc). > As the owner of the Corp, pay the rest of the comp as a dividend. Thus avoiding fica taxes. Sounds good in theory, but if you're operating as a consultant, charging clients one rate, and then only claiming 40% of that is your "reasonable salary" then the IRS is likely to see right through your scheme. They can, and will, send the S-Corp a bill for unpaid taxes when they recharacterize those "dividend payments" as salary for you. > You could do this with a simple s-Corp created with LegalZoom. $400. Starting an S-Corp is only the beginning. S-Corps are legally required to do a lot of record keeping, paperwork, filing, and even hold shareholder meetings with recorded minutes. Yes, even if you're the only shareholder and you're meeting with yourself. Some number of people do abuse the S-Corp status to dodge taxes by paying themselves in dividends with a token salary, but it's not an easy or risk-free tax dodge. The IRS may be understaffed for audits (for now) but they're not dumb when they actually start looking into these things.

derefr 5y ago
> if you're operating as a consultant, charging clients one rate, and then only claiming 40% of that is your "reasonable salary" Why would that be off? 40% sounds exactly right; large consultancies pay their consultants 40% (or less!) of what they’re charging clients for said consultants’ time. Maybe what you’re more concerned about here would be giving giving a 40%-of-revenue salary plus a 60%-of-revenue dividend. But the dividend wouldn’t be 60%. You, as the S-Corp, would be paying into all the regular withholding stuff companies have to pay into on behalf of their employees (social security, etc.). Ever heard the phrase “employing someone at a given salary, costs ≥200% of that salary”? It’s not far off.
aantix 5y ago
Your FUD isn't needed. This is a perfectly reasonable approach. You're both an employee and an owner of the Corp. And are entitled to benefits on each side. Dividend distributions are a common means of compensation to share holders. You are an investor in the company. Your usage of "scheme" is interesting and probably one of the many reasons why people like Bezos bring up so much vitriol when discussing taxes. I see this approach as a perfectly legitimate, thoughtful structure to the issue of division between employee and ownership compensation. You see it as a "scheme".

ModernMech 5y ago

It is also more work though. An S-Corp needs to have shareholder meetings, corporate bylaws, keep meetings minutes, final annual reports, requires a board of directors, and you have to be a US citizen/resident. These are all doable of course, but you have to make sure it's worth the tradeoff. The richer you are, the easier it is to hire someone to do all of this extra stuff for you.

gamblor956 5y ago

When I worked in a firm (doing tax law), I loved seeing posts like this online, because the idiots that followed this advice provided a steady stream of clients needing help with their IRS audits. If someone actually does follow your advice they will be audited, they will owe penalties and back taxes to the IRS. This is also known as a "false tax return", and so the statute of limitations never expires and the IRS has until the end of time to audit the understated returns.