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Actually as an S-Corp owner all the corporate income is taxed as REGULAR INCOME. It doesn't become a capital gains tax -- which is what I assume you mean by inv

by bravo22 12y ago

Actually as an S-Corp owner all the corporate income is taxed as REGULAR INCOME. It doesn't become a capital gains tax -- which is what I assume you mean by investment income. However the US government wants you to also pay Social Security and Medicare tax, which you only pay on employment income. Therefore they force you to take a "reasonable"[1] salary from the company. Everything else left in the company's account at the end of the year is your non-employment income. It avoids double taxation. It doesn't put you in a lower tax bracket. 1. Reasonable is determined by them.

tptacek 12y ago
It's taxed as regular income, but the premise under which it's exempt from the payroll taxes every other worker has to pay is that it's not normal income, but rather the return from an investment in the company. For people in our industry, it's hard to see a definition of "reasonable" that would be financially beneficial. You start a tech company. You pull $100k out every year, putting you right smack in the middle of the income distribution for experienced tech people. But because of a loophole, you get to reclassify $50k of that $100k as a distribution, and not pay FICA on it. To support that (sorry) scam, you claim $50k is your "reasonable" salary --- putting you way on the low side of the industry. How convenient. People obviously do it and get away with it. I'm glad it's an audit flag.
- moggflunkies 12y ago
  lol @ you forgetting that other businesses exist that operate in the margins of this kind of expense. That sorry scam may be the difference between a local hardware store, mechanic, coffee shop staying open and closing. Even owner/operators don't want to work for reduced wages. It's even more sorry to sit around on HN and forget that there are many more businesses that are as important or more important than a mobile app service for checking on and generating QR codes for sales at local restaurants. The IRS gets theirs, don't worry about that. It's just too bad that the spending side of the function is broke, not the revenue.
- cullenking 12y ago
  Sure, but you just mentioned an unreasonable salary. If the median is $100k, then that's reasonable, and the person only gets to avoid SS and medicare on any additional profit. I operate as an s-corp and pay myself a reasonable salary, matching that of the salary I could get in the current job market in the area I live in. Anything I clear above this is only taxed with my regular taxes. If I was running a C-Corp instead of an S-Corp, I'd get my $100k salary, and any extra would have been taxed at the 30% corporate rate when it was taken in, then the 20% capital gains when it's distributed to me as profit.
  - bravo22 12y ago
    Exactly. You could pull in sometimes 250-500K as a consulting company, specially if you outsource some aspects of projects. S-Corp is ideal for that.
    - tptacek 12y ago
      The FICA cap is 115k.
      - cullenking 12y ago
        The SS side of FICA is 115k. Medicare has no limit and is at 1.45%
- jasonwocky 12y ago
  > To support that (sorry) scam, you claim $50k is your "reasonable" salary --- putting you way on the low side of the industry. How convenient. I don't know. What salary would you take for your honest-to-god dream job?
  - timv 12y ago
    Is your "dream job" one where you are paid a pittance while the company owner makes a tidy profit from your endeavours? Many people will take a pay cut for their dream job, but very few are willing to be exploited in the process. If a company owner is taking a very low salary in order to maximise company profit (and minimise tax) then they (as an employer) are exploiting themselves (as an employee) to do so.
  - mikeash 12y ago
    I might take a $50,000 salary to fly gliders all day. But no matter how nice of a job it is, I'm not going to take a $50,000 salary to program computers all day, because I can get a job in that field that's only marginally less nice and pays way more.

by bravo22 12y ago

tptacek 12y ago

It's taxed as regular income, but the premise under which it's exempt from the payroll taxes every other worker has to pay is that it's not normal income, but rather the return from an investment in the company. For people in our industry, it's hard to see a definition of "reasonable" that would be financially beneficial. You start a tech company. You pull $100k out every year, putting you right smack in the middle of the income distribution for experienced tech people. But because of a loophole, you get to reclassify $50k of that $100k as a distribution, and not pay FICA on it. To support that (sorry) scam, you claim $50k is your "reasonable" salary --- putting you way on the low side of the industry. How convenient. People obviously do it and get away with it. I'm glad it's an audit flag.

moggflunkies 12y ago
lol @ you forgetting that other businesses exist that operate in the margins of this kind of expense. That sorry scam may be the difference between a local hardware store, mechanic, coffee shop staying open and closing. Even owner/operators don't want to work for reduced wages. It's even more sorry to sit around on HN and forget that there are many more businesses that are as important or more important than a mobile app service for checking on and generating QR codes for sales at local restaurants. The IRS gets theirs, don't worry about that. It's just too bad that the spending side of the function is broke, not the revenue.
cullenking 12y ago
Sure, but you just mentioned an unreasonable salary. If the median is $100k, then that's reasonable, and the person only gets to avoid SS and medicare on any additional profit. I operate as an s-corp and pay myself a reasonable salary, matching that of the salary I could get in the current job market in the area I live in. Anything I clear above this is only taxed with my regular taxes. If I was running a C-Corp instead of an S-Corp, I'd get my $100k salary, and any extra would have been taxed at the 30% corporate rate when it was taken in, then the 20% capital gains when it's distributed to me as profit.
- bravo22 12y ago
  Exactly. You could pull in sometimes 250-500K as a consulting company, specially if you outsource some aspects of projects. S-Corp is ideal for that.
  - tptacek 12y ago
    The FICA cap is 115k.
    - cullenking 12y ago
      The SS side of FICA is 115k. Medicare has no limit and is at 1.45%
jasonwocky 12y ago
> To support that (sorry) scam, you claim $50k is your "reasonable" salary --- putting you way on the low side of the industry. How convenient. I don't know. What salary would you take for your honest-to-god dream job?
- timv 12y ago
  Is your "dream job" one where you are paid a pittance while the company owner makes a tidy profit from your endeavours? Many people will take a pay cut for their dream job, but very few are willing to be exploited in the process. If a company owner is taking a very low salary in order to maximise company profit (and minimise tax) then they (as an employer) are exploiting themselves (as an employee) to do so.
- mikeash 12y ago
  I might take a $50,000 salary to fly gliders all day. But no matter how nice of a job it is, I'm not going to take a $50,000 salary to program computers all day, because I can get a job in that field that's only marginally less nice and pays way more.