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> 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). > A

> 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".
- gamblor956 5y ago
  Generally, if your S-Corps income exceeds the FICA threshold (currently $142,800), you must first pay yourself $142,800 as FICA-taxable salary before you can pay yourself a dividend. If your one-person S-Corp doesn't reach that level of income, all of its earnings should be paid as a salary subject to FICA. Also...S-corps don't pay dividends. I don't know who told you that. S-Corps are pass-through entities, so the portion of income paid to an owner other than as a salary retains the character it had when the S-corp received it, meaning that ordinary income to the S-Corp...is also taxable ordinary income to the owner. Importantly, this taxation applies whether the S-Corp actually send the earnings onward to its owners. S-Corps, like partnerships, may then distribute this already-taxed income to its owners then or at any point in the future, and it will be tax free, because the owners have already paid taxes on it.
  - aantix 5y ago
    >Generally, if your S-Corps income exceeds the FICA threshold (currently $142,800), you must first pay yourself $142,800 as FICA-taxable salary before you can pay yourself a dividend. Source? >If your one-person S-Corp doesn't reach that level of income, all of its earnings should be paid as a salary subject to FICA. Source?
  - aantix 5y ago
    >Generally, if your S-Corps income exceeds the FICA threshold (currently $142,800), you must first pay yourself $142,800 as FICA-taxable salary before you can pay yourself a dividend This isn't supported by Sean McAlary LTD, Inc. v. Commissioner, T.C. Summary Opinion 2013-62. "The IRS, as it’s wont to do, argued that McAlary was not reasonably compensated, and once again, the Service took a scientific approach. Utilizing the same engineer employed by the IRS in JD & Associates and Watson, the IRS determined that $100,000 of the $240,000 distribution represented McAlary’s “reasonable” compensation." https://www.forbes.com/sites/anthonynitti/2013/08/12/s-corporation-shareholder-employee-loses-reasonable-compensation-case-sun-rises-in-east/?sh=39fe68623349 https://www.forbes.com/sites/anthonynitti/2013/08/12/s-corpo...
    - 5y ago
Spooky23 5y ago
> The IRS may be understaffed for audits (for now) but they're not dumb when they actually start looking into these things. People don't get this. I have a family friend was was an IRS agent specializing in a few niche frauds. His personal caseloads pulled in 9-figure recoveries and a few criminal prosecutions a year. When he started in the late 80s, there were about 100 agents working those cases. When he retired a few years ago, it had attrited down to 4, and was doing half of the cases he had been due to the travel requirements for audit and court appearances, which could take him as far away as Guam or as close as in his backyard. Definitely a super-smart dude, I remember going to parties with some of his work buddies and they were a unique group of really passionate nerds about tax and accounting issues.
0x000000001 5y ago
My accountant working for respected accounting firm in my state literally told me to do this. I've spoken with others, and this is the exact advice they give to S-Corp clients. I pay myself a "salary" of $60k and the rest (~$240k) is dividends. I pay my taxes quarterly too.

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".

gamblor956 5y ago
Generally, if your S-Corps income exceeds the FICA threshold (currently $142,800), you must first pay yourself $142,800 as FICA-taxable salary before you can pay yourself a dividend. If your one-person S-Corp doesn't reach that level of income, all of its earnings should be paid as a salary subject to FICA. Also...S-corps don't pay dividends. I don't know who told you that. S-Corps are pass-through entities, so the portion of income paid to an owner other than as a salary retains the character it had when the S-corp received it, meaning that ordinary income to the S-Corp...is also taxable ordinary income to the owner. Importantly, this taxation applies whether the S-Corp actually send the earnings onward to its owners. S-Corps, like partnerships, may then distribute this already-taxed income to its owners then or at any point in the future, and it will be tax free, because the owners have already paid taxes on it.
- aantix 5y ago
  >Generally, if your S-Corps income exceeds the FICA threshold (currently $142,800), you must first pay yourself $142,800 as FICA-taxable salary before you can pay yourself a dividend. Source? >If your one-person S-Corp doesn't reach that level of income, all of its earnings should be paid as a salary subject to FICA. Source?
- aantix 5y ago
  >Generally, if your S-Corps income exceeds the FICA threshold (currently $142,800), you must first pay yourself $142,800 as FICA-taxable salary before you can pay yourself a dividend This isn't supported by Sean McAlary LTD, Inc. v. Commissioner, T.C. Summary Opinion 2013-62. "The IRS, as it’s wont to do, argued that McAlary was not reasonably compensated, and once again, the Service took a scientific approach. Utilizing the same engineer employed by the IRS in JD & Associates and Watson, the IRS determined that $100,000 of the $240,000 distribution represented McAlary’s “reasonable” compensation." https://www.forbes.com/sites/anthonynitti/2013/08/12/s-corporation-shareholder-employee-loses-reasonable-compensation-case-sun-rises-in-east/?sh=39fe68623349 https://www.forbes.com/sites/anthonynitti/2013/08/12/s-corpo...
  - 5y ago

Spooky23 5y ago

> The IRS may be understaffed for audits (for now) but they're not dumb when they actually start looking into these things. People don't get this. I have a family friend was was an IRS agent specializing in a few niche frauds. His personal caseloads pulled in 9-figure recoveries and a few criminal prosecutions a year. When he started in the late 80s, there were about 100 agents working those cases. When he retired a few years ago, it had attrited down to 4, and was doing half of the cases he had been due to the travel requirements for audit and court appearances, which could take him as far away as Guam or as close as in his backyard. Definitely a super-smart dude, I remember going to parties with some of his work buddies and they were a unique group of really passionate nerds about tax and accounting issues.

0x000000001 5y ago

My accountant working for respected accounting firm in my state literally told me to do this. I've spoken with others, and this is the exact advice they give to S-Corp clients. I pay myself a "salary" of $60k and the rest (~$240k) is dividends. I pay my taxes quarterly too.