4 ms·

Hmm.. question for u. Say I start a corporation, with just me and another partner, and I need to pay myself... So the revenue earned by the company that's paid

Hmm.. question for u. Say I start a corporation, with just me and another partner, and I need to pay myself... So the revenue earned by the company that's paid to me. that's taxed once by the company. And then again by me as salary. No? Isn't that how it works?

logjammer 13y ago
No, that is not how it works. Your salary is an expense for the company, paid before any corporate tax is paid, and thus reduces corporate tax. A company that has $10MM in revenue, and $10MM in salary expense will pay zero corporate income tax.
- gamblor956 13y ago
  A company paying its owner $10mm in salary cannot deduct all $10 million. It could probably get away with paying a six-figure salary (fully deductible), but the rest would be re-characterized as a dividend and the underlying "salary" expense would not be deductible. At the numbers we're talking about in this hypothetical, the corporation would be treated as severely underreporting its tax liability--meaning the highest penalty rates, back interest, and possibly including jail time.
  - res0nat0r 13y ago
    His point is: salaries are an expense.
  - logjammer 13y ago
    My point was that salaries are an expense taken before companies pay income tax, which was contrary to what the parent post guessed. Reasonable salary guidelines are a completely different matter, and I never meant to suggest that a $10MM revenue company would have a single employee who made $10MM. That example is just some pedantic nonsense you made up so you could feel smart, while you were actually just a moron who misses the forest for the trees.
gamblor956 13y ago
Yes and no. What the other comments are ignoring is that the deductibility of salary paid to owners is capped, precisely to avoid the shenanigans they're trying to achieve (i.e., avoiding double taxation using the corporate form). Up to a limit, your salary as owner is deductible to the corporation. Generally, the "safe" limit is usually the current SSI maximum wage. Beyond that, the IRS is very likely to re-characterize wages paid to owners as dividends. While this actually results in a lower (direct) tax to the owner, it usually results in higher taxes to the corporation, plus penalties and back interest. Note that this is generally true for LLCs, S-Corps, and C-Corps, though the precise rules differ based on the type of entity. You'll definitely want to talk to a lawyer or accountant.

logjammer 13y ago

No, that is not how it works. Your salary is an expense for the company, paid before any corporate tax is paid, and thus reduces corporate tax. A company that has $10MM in revenue, and $10MM in salary expense will pay zero corporate income tax.

gamblor956 13y ago
A company paying its owner $10mm in salary cannot deduct all $10 million. It could probably get away with paying a six-figure salary (fully deductible), but the rest would be re-characterized as a dividend and the underlying "salary" expense would not be deductible. At the numbers we're talking about in this hypothetical, the corporation would be treated as severely underreporting its tax liability--meaning the highest penalty rates, back interest, and possibly including jail time.
- res0nat0r 13y ago
  His point is: salaries are an expense.
- logjammer 13y ago
  My point was that salaries are an expense taken before companies pay income tax, which was contrary to what the parent post guessed. Reasonable salary guidelines are a completely different matter, and I never meant to suggest that a $10MM revenue company would have a single employee who made $10MM. That example is just some pedantic nonsense you made up so you could feel smart, while you were actually just a moron who misses the forest for the trees.

gamblor956 13y ago

Yes and no. What the other comments are ignoring is that the deductibility of salary paid to owners is capped, precisely to avoid the shenanigans they're trying to achieve (i.e., avoiding double taxation using the corporate form). Up to a limit, your salary as owner is deductible to the corporation. Generally, the "safe" limit is usually the current SSI maximum wage. Beyond that, the IRS is very likely to re-characterize wages paid to owners as dividends. While this actually results in a lower (direct) tax to the owner, it usually results in higher taxes to the corporation, plus penalties and back interest. Note that this is generally true for LLCs, S-Corps, and C-Corps, though the precise rules differ based on the type of entity. You'll definitely want to talk to a lawyer or accountant.