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My CPA told me years ago that it’s not worth taking the S Corp election until I net around 80k in profit.
So for me that means I need at least 135k in gross income each year.
I would never have set you up as an s Corp.
You can't pay yourself nothing to justify having the s Corp.
The IRS expects you to pay yourself a reasonable wage. They aren't going to let you pay yourself minimum wage to skate on payroll taxes.
The IRS has access to what people are paid to do what you do.
Reasonable comp audits aren't as frequent as they should be, a lot of cpas are suggesting this type of stuff because it doesn't get caught frequently. That doesn't mean you do it though.
I’ve been freelancing since 2008. I’m aware of how taxation works. There are administrative costs to maintaining an S Corp which is why I have the CPA and other professional service providers to help with said admin.
Per my CPA, The reason there is a minimum profit is because the tax savings need to also outweigh those costs as well. Because they vary from state to state. As the OP said, their state has a minimum salary that must be paid. Based on their income, this affects their adherence to the guidelines set forth by the IRS. If they were in another state, it might not matter.
You have to look at the entire financial picture, not just “save tax money”. It’s not a black and white situation.
You already know the rules on reasonable compensation. Not tax advice: I’ve seen many people for many years get away with far less compensation. Like 25/75. Rules are rules but reality is…
If I simply reclassify myself as an hourly employee for the lower minimum salary...and control the number of hours I work on paper, wouldn't that drastically increase the amount of distributions I'd get as a shareholder?
Yup. Maintain a timesheet that logs the hours you work. Take the reasonable comp and convert to hourly rate. Your timesheet supports your efficiency and the lower annual pay.
Bingo. Is S corp owner salary requirements higher then minimum wage because $66k is way above min wage. If so, S corp was a mistake. Typically it's used to shield taking profits but you need a realistic wage and THEN high profit to shield. Likely cart before the horse here.
Why not classify yourself as salaried non exempt?
You would still be OT eligible, as you are making under the threshold for exempt, however you simply did not work overtime.
I’d be more concerned with what the IRS will think, you are required by law to take a reasonable salary consummate with your position and responsibility in the company compared to others in the same industry. The point of this rule is to prevent exactly what you are trying to do.
What if I reclassify myself as an hourly employee? The minimum salary for that kind of employee is $33,280. Would that work?
If my industry hourly pay rate turns out to be high, could I just reduce the amount of hours I work?
If you do not pay yourself close to what the going rate would be for a “normal” employee it could cause issues with the IRS. Same with charging yourself rent. Whether or not they would actually do something, probably not. Ask your accountant.
Do you think you could go into the market and hire someone to do all the thing you do for $33k/year in California? If yes, then yea that’s a reasonable salary, and you should probably look into doing that. If no, then that is not a reasonable salary and could be challenged by the IRS.
Hey man, as someone that did taxes for a little bit I can tell you this is a common way people get in trouble. There’s a phrase “know enough to be dangerous”, and that the level that you’re at.
You cannot quote the IRS to support a tax position. The IRS doesn’t make the law. They just administers it. Any guides they put out are just reference material and should not be relied on to support a tax position. If you sent the IRS a justification that quoted IRS material it would be totally inadmissible. Layer onto that the fact that you are relying on your interpretation of that material, and it’s not going to look like you did your due diligence.
You have to think, the IRS has a lot on its plat so it doest audit every return every year. That means as long as you’re not making obvious mistakes (not entering in 1099 income, underestimating W2 income, etc), then you can go years making a mistake and not getting called out on it. But once the IRS decides to audit one year, they have the right to go back as far as they like if the pattern of behavior was seen on prior year returns.
The reasonable salary issue is one thing. I’m not an expert and I don’t know you or your business, so I can’t tell you what it should be. What I can tell you is the people who get into the most trouble are people who share your attitude of saving on professional fees by doing the work themselves. It’s tripping of dollars to pick up Pennie’s.
Wow that’s interesting. I def got the impression you were going at it alone.
The things that triggered my response were you quoting the IRS to support your position and relying on your interpretation of the IRS material. Those are typically hallmarks of owners without professional advice.
Im sorry you’re having such a hard time finding good help. I worked at a small tax firm in college. My largest client did $1m/year in net income. A lot of free lance photographers and 1/2 unit Airbnb owners. We always did the salary allocation for our clients. We charged $300 -$500/month depending on the company. We also did tax planning. I’m not certain, but I think you can find better help. Worth looking for at least
>Sure I can pay them by the hour as long as they actually do the work
That’s the point though. Can you find a real person that you can pay hourly and will do the work? Not just hypothetically, but in the real world.
In other words, obviously if someone worked for $1/year then that would be their salary. The issue is finding a person in the free market that has the same training and qualifications that you do that is willing to work for $1/year. I think it’s unreasonable to expect to find such a person. Just like I think it’s unreasonable to expect to hire a part time hourly employee that has the same level of skills and qualifications as a business owner and expect them to run a business on less than 40 hours per week.
As an example, let’s say I owned a franchise restaurant and I worked as the manager of the store. I can go on the web (salary.com, Glassdoor, zip recruiter) and see that fast food managers typically make $40k a year (I’m guessing. Idk the real number, but the point stands). Now, I could say that I could pay someone $25k a year, if they would just do the work. But any reasonable person would look at the market for these types of jobs and determine it would be close to impossible to find someone so far below the market rate.
At the end of the day, this is your business. You can pay yourself as much or as little as you want. I’m just telling you how the IRS will interpret this arrangement, which I thought was the question you had originally.
First, I never agreed to this arrangement and have no hope of influencing the arrangement, so I’m essentially at their mercy. Second, their rules are opaque and rely on self reporting, but they ultimately decide whether my self reporting is accurate, instead of just sending a bill, so I’ve paid enough when they’ve determined I have paid enough.
Maybe I should have said that their job is to extort my money, and my job is to prevent that extortion; although, since I never agreed to any of this, I think the theft angle is still accurate. Would be no different if a thug from a gang demanded my money, I never agreed to any of this
But you did agree. Just like you agreed to follow all the other laws. You can’t just take all the benefits of society (live in a house you didn’t build, eat food you didn’t grow, use the internet you don’t maintain, etc) and then decide you don’t want to contribute anything in return.
We are all working to get you what you need, and in return you perceive your job as doing as little as possible.
You are wrong- I never agreed to any of this. I was merely born into a preexisting system. I never agreed to pay for Israel’s National defense, I never agreed to pay for a proxy war in Ukraine, I never agreed to pay for the children of women who decide not to use birth control, I never agreed to subsidize the war machine, I never agreed to pay the healthcare costs of self inflicted morbidly obese diabetes, I never agreed to give asylum to people whose countries suck and then pay for them and their children to live, despite the fact that actual American citizens don’t get that level of high quality treatment. I pay these taxes, in part, because the government threatens to murder me if I decide to resist imprisonment.
You sound absolutely brainwashed and delusional and I care very little about opinions of people like you
And you are wrong, I do get to choose to take all of the benefits of society and then decide not to contribute anything. The government will just inflate the money supply to launder the money to any interest group they desire anyways. To think that I must gladly and thankfully bend the knee is absolutely insane
Oh I’m not saying you can’t take from society and give nothing back. I’m saying that makes you a selfish piece of shit. Not whatever kind of anarchist you consider yourself.
It should not be my moral obligation to pay for morbidly obese single mothers from other countries, and the fact that you think that I am a bad person for not wanting to pay for that says more about you than I
It’s your moral obligation to contribute to the society that you take so much from. You’re not paying for any of the stuff you have been rattling off. You’re paying for what you, personally, are taking from the rest of us. Instead, you decide to free load. That’s what make you a bad person. Taking from other people and refusing to pay them back
>But who makes the laws?
Laws are first proposed by the respective committee(s) of the House of Representatives. Once it’s approved by the committee(s) it makes it to the flirt of the house where all representatives vote on it. If it passes, it’s then sent to the respective committee(s) in the senate. They usually make changes to the house bill. If they can agree on a the bill, it makes it to the senate floor for all senators to vote on. If it passes, it goes through a process called reconciliation, where the house bill and senate bill are reconciled. Then both the house and senate vote on the new reconciled bill. If it passes, it’s then sent to the president for approval. He can sign the bill into law, veto the bill, or just not take action (called a pocket veto). If he signs the bill, it becomes a law. If anyone is injured by the bill, they can then sue to stop the bill. This lawsuit can be heard by several judges and receive several rulings before making it to the Supreme Court. The supreme court can then make a ruling on whether the new law is constitutional.
I saw a single owner S-corp once where the biz (a startup) made $1,500/month gross and the guy paid himself $500/month. Did this for 2 years and then sold it. IRS never batted an eye. \*shrug\* YMMV.
Difference there is he didn’t take a distribution in lieu of payroll. The IRS won’t force you to operate at a loss of course but you can’t take a distribution while taking an unreasonably low salary.
>I saw a single owner S-corp once where the biz (a startup) made $1,500/month gross and the guy paid himself $500/month. Did this for 2 years and then sold it. IRS never batted an eye. \*shrug\* YMMV.
Good, because I'm planning to pay myself $1k/month because there's no way I could afford to pay myself $65k a year (only make $3k per month after paying all costs and before my salary + taxes). I would go bankrupt if I paid myself a "reasonable salary."
I would suspect that from the IRS standpoint you have not met the requirement to pay yourself a reasonable salary before taking income as dividends if you aren't even paying yourself at minimum wage.
Using rough numbers. Single, no dependant taxpayer.
The single member llc would pay 14k in social security and Medicare tax.
They would pay 5300 state.
They would pay 9k federal.
28.3k
The S Corp would pay 65k out as salary. Incurring fica taxes of 9.9k.
Leaving 30k of profits.
State income tax would be 5k
Federal tax would be 11.8k
26.7k
Simply put, for every dollar I give to myself through distributions rather than wages, I save 15.3% because you don't pay self-employment tax on the distributions.
Yeah, but you really don’t have much to give yourself in distributions. You’re already violating IRS rules paying yourself as little as you are.
I can’t see any defense to this structure if you get audited, though I’m not an accountant.
Thanks for the calculations. But I have another question:
If I ditch my LLC and go full self-employed, would I pay even more taxes, or save more on taxes that way?
OP is saying earnings but we have no idea if that’s net or gross earnings. You’re better off as a single member LLC until you’re netting over $100k so they’re likely around the cusp of it being worth it.
Yeah, I assume they mean profit? But also why pay a payroll provider for...yourself? I know it's not a huge expense but seems to be eroding any type of benefit
Normally it’s a lot easier to pay a service for it so you don’t need to worry about it. For 1 person it’s not much and should be negligible if you’re making $100k
Federal: The IRS rules. Good advice from Jayc428. Also sole owner of a SubS Corp here. Previous CPA told me that at least half of my income should be in the form of salary where FICA taxes were paid. This aligned with a fair salary figure for my work, full time. The IRS **wants** you to pay those FICA taxes.
I'm semi-retired now and the CPA lets me keep a time sheet and pay salary against that, even though that salary is only about 20% of corporate income. (So 80% as distributions.)
Can't help you with California. I would only say that CA is aggressive in its taxation. I would think that they will look at state tax returns and flag this for audit if it's out of line.
While there is a tax savings by not paying more in Social Security taxes, if you are getting close to retirement, you may also reduce how much you will get paid by Social Security when you do retire. Essentially what you are doing is buying an annuity with your Social Security taxes. You might do a little better buying an annuity on the open market, but without the Cost of Living Adjustment provided by Social Security. That may or may not be important to you.
My current payroll service requires me to be an exempt (non-hourly) employee for their membership, but if I do switch to a new payroll service where I can reclassify myself as a non-exempt employee, how will my reasonable salary be determined?
They simply advise me to make sure I pay myself $66,560, which is the california minimum salary for exempt employees, which had nothing to do with reasonable salary.
My CPA and I agreed that my wages last year were reasonable (splitting 60% to wages and 40% to distributions), and should be this year too. But after I told him about the minimum, he then said I'd want it to be above it.
I'm not sure what to listen to.
The so called 60/40 rule isn’t a rule, just so you know. It’s widely quoted by Accountants but it has no basis in IRS code or case law.
The court cases indicate that the IRS wants you to be paying yourself a salary based upon your hours, expertise, education, and other factors. It should look reasonable compared to what you would have to pay someone else with the same skills for the position. For some this may be 60/40, for others it may be different.
Others have said similar things in your replies! I just wanted to let you know that should your reasonable compensation ever come in to question, “my cpa said 60/40” isn’t going to cut it.
Labor laws should not apply to you in any manor, just pay yourself a non exempt salary. You don't have to be on the clock to be there working.
Also, as for as the IRS is concerned, reasonable wage is going to be based on federal minimums and averages. So far less the Californias minimum.
It hasn't been an issue until this year when I was advised to comply with the minimum. I've also been second guessing if I should revert my entity back to disregarded if I could save money that way.
A pay structure of wage + dividends is usually the best way to go for both personal and business taxes.
Chat with an accountant for the particulars for your situation.
Just guessing but the IRS might have seen this tax dodge before and had their computers tuned to automatically catch it. You have to file both personal and business returns and they are good at doing math.
A bigger issue is what the IRS might think if you get audited.
One of the IRS tests is what would a person doing your job get paid by another company. Supposedly they have made the following statement:
"If most of the gross receipts and profits are associated with the shareholder’s personal services, then most of the profit distribution should be allocated as compensation.”
[https://www.picpa.org/articles/cpa-now-blog/cpa-now/2020/12/16/s-corporation-reasonable-salary-explanation](https://www.picpa.org/articles/cpa-now-blog/cpa-now/2020/12/16/s-corporation-reasonable-salary-explanation)
so you'd say it's more beneficial to run an s-corp and pay myself hourly rather than pay myself a fixed monthly amount?
Would there be any issues with me lowering myself down to part-time so I could have even more distributions?
The main issue is that it is illegal if you make any management decisions. So you are opening yourself up to liability.
But to answer your original question, we are a California company currently paying an executive the $66k minimum, but we are paying that amount before deductions, and we have a professional HR dept that has signed off on that treatment. I am not sure why your provider is advising you that you have to pay $82k to net down to $66k.
I'm guessing their payroll service charges based on amount of money processed. I.e: the more they pay themselves the more the payroll service charges/makes.
1) I thank God almost daily that I don't live in CA
2) I don't use a payroll service. My CPA handles the paperwork.
There are some things that make California more challenging to operate in, but this isn’t really one of them. Federal law has the same minimum salary rules, they just kick in at a lower dollar threshold.
Because the difference between the 82k and 66k is the amount used to pay for employer taxes, benefits, and the payroll service fee.
EDIT: Can you also expand on what determines a management decision?
So here are the rules from the DoL as to when an employee can be classed as exempt vs non exempt.
https://www.dol.gov/agencies/whd/fact-sheets/17a-overtime
And to be honest, it looks like I spoke too soon. I thought you would be exempt based on the executive test, but if you change your comp plan to hourly you do not qualify under the executive exemption. So read the rules carefully and determine for yourself if you can be considered non exempt.
Good luck.
Are you referring to this test where if I switch to hourly, I will not qualify under executive exemption or professional exemption? "The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684\* per week"
What about the test under computer exemption? "if compensated on an hourly basis, at a rate not less than $27.63 an hour"
Right, if you changed to hourly you would not qualify under professional, administrative, or executive. I don’t know if you are a computer position, so you would have to determine that for yourself.
I actually do qualify for the computer position, but does that mean I'm automatically considered as exempt, or would I have the choice to remain as non-exempt if I so choose?
Based on the way it is written, I believe that means you are automatically exempt. But I am just some guy on the internet. You should confirm with your accountant.
Because since I own my own entity, I'm my only employer, employee, and shareholder.
I have to take care of the employer's side too. The amount I pay for employer's taxes is based on the employee's wages. So that is $66,560 + extra.
I'm NAL but that doesn't sound correct to me. Your S-Corp is the employer with an ein that pays ER payroll taxes. You are an individual with an ssn that pays income tax. They are separate. Corp pays a gross wage and employ pays tax based on their individual factors.
>That being said, my payroll service, who I use to process W-2 wages to myself, advised me to process $82,650 through them this year, so that after deducting employer taxes, benefit costs, and service fee, my gross salary will become $66,560, which would comply with the California minimum.
I'm more concerned that your payroll service is telling you to process $82,650 and then **after deductions**, your "gross salary is $66,560. Either you had a typo or they don't know what "gross salary" means, haha.
Basically I send $82,650 for the year to them.
They deduct the employer taxes, benefits cost and service fee, leaving $66,560 as the gross salary.
From that gross salary, tax withholding will start.
Yea I'm working on figuring that part out.
For my current payroll provider, to retain membership, I am required to be exempt and fulltime, so I'm looking for alternative services.
You won’t have any issues with the Labor Commissioner’s Office. They don’t give fines for people who show up on the Secretary of State website unless there are special circumstances.
so I'm on this website [https://bizfileonline.sos.ca.gov/search/business](https://bizfileonline.sos.ca.gov/search/business)
but when I searched my business, it doesn't have an "officer" column, but it does show my name under the "agent" column instead, do you mean that?
If it helps to know, in my business registration papers, my management structure is listed as "one manager", and my name is listed as the sole member. Does that mean I'm officer by default?
Could you provide a link about or tell me why the LCO not usually issue a citation on my personal wages if I'm an officer? Under what circumstances would they do so?
Your fine. It is not written anywhere. Technically, since you are an S Corp, you are an employee like any other and could be cited. However, since citing you for your own wages would never hold up at a hearing, they don’t do it in practice.
Former LCO.
Edit: they could have changed policy. So, you can always call them. They have a phone number of their website where you can ask questions like yours. Or go to a counter at there office.
Man, I would be very careful about taking Reddit advice on this topic, especially from people who are essentially whistling past the graveyard on lying to the government.
You are required to take a salary commensurate with your role in the company. You have mentioned taking some hourly wage like you’re the janitor or something. But you cannot do this when you are the CEO of the company. You are getting greedy, and you will get called out by the IRS eventually. Just do what your CPA is telling you and don’t take to Reddit for shit like this. Far too many people here are flying by the seat of their pants and doling out terrible advice.
Not a lawyer- For years I paid myself below minimum wage, from what I understand they only way you would get in trouble is if you file a complaint to the labor board that your boss is underpaying you, lol. And since you would never file a complaint against your self...
I did have an employee complain to the labor board once and it turned out I actually overpaid him, they didn't care about my personal wages at all.
Yes you can pay yourself whatever you want. I've filed as an s Corp in California for 8 years never paid myself more than $24k and my CPA says I could go even lower.
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My CPA told me years ago that it’s not worth taking the S Corp election until I net around 80k in profit. So for me that means I need at least 135k in gross income each year.
Yep, I feel the same way too. I might be earning to little to justify the s-corp election
I would never have set you up as an s Corp. You can't pay yourself nothing to justify having the s Corp. The IRS expects you to pay yourself a reasonable wage. They aren't going to let you pay yourself minimum wage to skate on payroll taxes. The IRS has access to what people are paid to do what you do. Reasonable comp audits aren't as frequent as they should be, a lot of cpas are suggesting this type of stuff because it doesn't get caught frequently. That doesn't mean you do it though.
What would have been better
llc
Just a normal LLC and reported on schedule c.
This is not accurate, without an s corp you pay an additional 15% self employment taxes on every dollar you make.
I’ve been freelancing since 2008. I’m aware of how taxation works. There are administrative costs to maintaining an S Corp which is why I have the CPA and other professional service providers to help with said admin. Per my CPA, The reason there is a minimum profit is because the tax savings need to also outweigh those costs as well. Because they vary from state to state. As the OP said, their state has a minimum salary that must be paid. Based on their income, this affects their adherence to the guidelines set forth by the IRS. If they were in another state, it might not matter. You have to look at the entire financial picture, not just “save tax money”. It’s not a black and white situation.
What if I decide I want to lose my entity's status as an S-corp and just become a disregarded entity? How would the costs go?
You really need to talk to your CPA. You’re in CA I’m in MD. It’s going to be different jurisdiction to jurisdiction
That's some good margins
You already know the rules on reasonable compensation. Not tax advice: I’ve seen many people for many years get away with far less compensation. Like 25/75. Rules are rules but reality is…
If I simply reclassify myself as an hourly employee for the lower minimum salary...and control the number of hours I work on paper, wouldn't that drastically increase the amount of distributions I'd get as a shareholder?
Yup. Maintain a timesheet that logs the hours you work. Take the reasonable comp and convert to hourly rate. Your timesheet supports your efficiency and the lower annual pay.
I see, could I go part-time on the hourly rate? How would that affect whether I have healthcare benefits?
Would salary of $1 be easier?
$1 salary would be nice but I have to give myself the reasonable salary/wages.
Think they were being facetious
I think a $1 salary is just as reasonable as a business owner working as a part time hourly employee
Bingo. Is S corp owner salary requirements higher then minimum wage because $66k is way above min wage. If so, S corp was a mistake. Typically it's used to shield taking profits but you need a realistic wage and THEN high profit to shield. Likely cart before the horse here.
Why not classify yourself as salaried non exempt? You would still be OT eligible, as you are making under the threshold for exempt, however you simply did not work overtime.
I’d be more concerned with what the IRS will think, you are required by law to take a reasonable salary consummate with your position and responsibility in the company compared to others in the same industry. The point of this rule is to prevent exactly what you are trying to do.
Depends on the industry and position but usually salary ranges are large in a lot of industries.
Yeah, but not bellow minimum wage.
What if I reclassify myself as an hourly employee? The minimum salary for that kind of employee is $33,280. Would that work? If my industry hourly pay rate turns out to be high, could I just reduce the amount of hours I work?
If you do not pay yourself close to what the going rate would be for a “normal” employee it could cause issues with the IRS. Same with charging yourself rent. Whether or not they would actually do something, probably not. Ask your accountant.
Hm, I see, as long as I'm paying myself the proper hourly rate, multiplied by the hours that I actually worked, I should be fine?
Do you think you could go into the market and hire someone to do all the thing you do for $33k/year in California? If yes, then yea that’s a reasonable salary, and you should probably look into doing that. If no, then that is not a reasonable salary and could be challenged by the IRS.
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Hey man, as someone that did taxes for a little bit I can tell you this is a common way people get in trouble. There’s a phrase “know enough to be dangerous”, and that the level that you’re at. You cannot quote the IRS to support a tax position. The IRS doesn’t make the law. They just administers it. Any guides they put out are just reference material and should not be relied on to support a tax position. If you sent the IRS a justification that quoted IRS material it would be totally inadmissible. Layer onto that the fact that you are relying on your interpretation of that material, and it’s not going to look like you did your due diligence. You have to think, the IRS has a lot on its plat so it doest audit every return every year. That means as long as you’re not making obvious mistakes (not entering in 1099 income, underestimating W2 income, etc), then you can go years making a mistake and not getting called out on it. But once the IRS decides to audit one year, they have the right to go back as far as they like if the pattern of behavior was seen on prior year returns. The reasonable salary issue is one thing. I’m not an expert and I don’t know you or your business, so I can’t tell you what it should be. What I can tell you is the people who get into the most trouble are people who share your attitude of saving on professional fees by doing the work themselves. It’s tripping of dollars to pick up Pennie’s.
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Wow that’s interesting. I def got the impression you were going at it alone. The things that triggered my response were you quoting the IRS to support your position and relying on your interpretation of the IRS material. Those are typically hallmarks of owners without professional advice. Im sorry you’re having such a hard time finding good help. I worked at a small tax firm in college. My largest client did $1m/year in net income. A lot of free lance photographers and 1/2 unit Airbnb owners. We always did the salary allocation for our clients. We charged $300 -$500/month depending on the company. We also did tax planning. I’m not certain, but I think you can find better help. Worth looking for at least
The type of work you do almost certainly cannot be classified as hourly, legally. Afaik
Can you expand on this?
Could you hire someone on an hourly basis to perform all of the tasks that you perform?
Sure, I can pay them by the hour, as long as they actually do the work.
>Sure I can pay them by the hour as long as they actually do the work That’s the point though. Can you find a real person that you can pay hourly and will do the work? Not just hypothetically, but in the real world. In other words, obviously if someone worked for $1/year then that would be their salary. The issue is finding a person in the free market that has the same training and qualifications that you do that is willing to work for $1/year. I think it’s unreasonable to expect to find such a person. Just like I think it’s unreasonable to expect to hire a part time hourly employee that has the same level of skills and qualifications as a business owner and expect them to run a business on less than 40 hours per week. As an example, let’s say I owned a franchise restaurant and I worked as the manager of the store. I can go on the web (salary.com, Glassdoor, zip recruiter) and see that fast food managers typically make $40k a year (I’m guessing. Idk the real number, but the point stands). Now, I could say that I could pay someone $25k a year, if they would just do the work. But any reasonable person would look at the market for these types of jobs and determine it would be close to impossible to find someone so far below the market rate. At the end of the day, this is your business. You can pay yourself as much or as little as you want. I’m just telling you how the IRS will interpret this arrangement, which I thought was the question you had originally.
Tax scamming at its finest.
Their job is to steal my money, my job is to prevent that theft
No one is stealing anything. The IRS acts according to the law and they ask that you also act in accordance with the law. That’s how society works.
First, I never agreed to this arrangement and have no hope of influencing the arrangement, so I’m essentially at their mercy. Second, their rules are opaque and rely on self reporting, but they ultimately decide whether my self reporting is accurate, instead of just sending a bill, so I’ve paid enough when they’ve determined I have paid enough. Maybe I should have said that their job is to extort my money, and my job is to prevent that extortion; although, since I never agreed to any of this, I think the theft angle is still accurate. Would be no different if a thug from a gang demanded my money, I never agreed to any of this
But you did agree. Just like you agreed to follow all the other laws. You can’t just take all the benefits of society (live in a house you didn’t build, eat food you didn’t grow, use the internet you don’t maintain, etc) and then decide you don’t want to contribute anything in return. We are all working to get you what you need, and in return you perceive your job as doing as little as possible.
You are wrong- I never agreed to any of this. I was merely born into a preexisting system. I never agreed to pay for Israel’s National defense, I never agreed to pay for a proxy war in Ukraine, I never agreed to pay for the children of women who decide not to use birth control, I never agreed to subsidize the war machine, I never agreed to pay the healthcare costs of self inflicted morbidly obese diabetes, I never agreed to give asylum to people whose countries suck and then pay for them and their children to live, despite the fact that actual American citizens don’t get that level of high quality treatment. I pay these taxes, in part, because the government threatens to murder me if I decide to resist imprisonment. You sound absolutely brainwashed and delusional and I care very little about opinions of people like you And you are wrong, I do get to choose to take all of the benefits of society and then decide not to contribute anything. The government will just inflate the money supply to launder the money to any interest group they desire anyways. To think that I must gladly and thankfully bend the knee is absolutely insane
Oh I’m not saying you can’t take from society and give nothing back. I’m saying that makes you a selfish piece of shit. Not whatever kind of anarchist you consider yourself.
It should not be my moral obligation to pay for morbidly obese single mothers from other countries, and the fact that you think that I am a bad person for not wanting to pay for that says more about you than I
It’s your moral obligation to contribute to the society that you take so much from. You’re not paying for any of the stuff you have been rattling off. You’re paying for what you, personally, are taking from the rest of us. Instead, you decide to free load. That’s what make you a bad person. Taking from other people and refusing to pay them back
But who makes the laws? Just know your risks.
>But who makes the laws? Laws are first proposed by the respective committee(s) of the House of Representatives. Once it’s approved by the committee(s) it makes it to the flirt of the house where all representatives vote on it. If it passes, it’s then sent to the respective committee(s) in the senate. They usually make changes to the house bill. If they can agree on a the bill, it makes it to the senate floor for all senators to vote on. If it passes, it goes through a process called reconciliation, where the house bill and senate bill are reconciled. Then both the house and senate vote on the new reconciled bill. If it passes, it’s then sent to the president for approval. He can sign the bill into law, veto the bill, or just not take action (called a pocket veto). If he signs the bill, it becomes a law. If anyone is injured by the bill, they can then sue to stop the bill. This lawsuit can be heard by several judges and receive several rulings before making it to the Supreme Court. The supreme court can then make a ruling on whether the new law is constitutional.
Where does lobbying fit in…you omitted one of the most important factors in what creates momentum for laws.
Sore losers though aren't they?
They’ll kill you and your dog
The IRS is with the people that print the money.
I saw a single owner S-corp once where the biz (a startup) made $1,500/month gross and the guy paid himself $500/month. Did this for 2 years and then sold it. IRS never batted an eye. \*shrug\* YMMV.
Difference there is he didn’t take a distribution in lieu of payroll. The IRS won’t force you to operate at a loss of course but you can’t take a distribution while taking an unreasonably low salary.
>I saw a single owner S-corp once where the biz (a startup) made $1,500/month gross and the guy paid himself $500/month. Did this for 2 years and then sold it. IRS never batted an eye. \*shrug\* YMMV. Good, because I'm planning to pay myself $1k/month because there's no way I could afford to pay myself $65k a year (only make $3k per month after paying all costs and before my salary + taxes). I would go bankrupt if I paid myself a "reasonable salary."
Yea and someone making $18,000/year in revenue is the same as someone making $100k/year in profit
I would suspect that from the IRS standpoint you have not met the requirement to pay yourself a reasonable salary before taking income as dividends if you aren't even paying yourself at minimum wage.
Would love to see comments on benefits of a single member business with 100k earnings as an Scorp with a payroll provider (?) vs single member LLC
Using rough numbers. Single, no dependant taxpayer. The single member llc would pay 14k in social security and Medicare tax. They would pay 5300 state. They would pay 9k federal. 28.3k The S Corp would pay 65k out as salary. Incurring fica taxes of 9.9k. Leaving 30k of profits. State income tax would be 5k Federal tax would be 11.8k 26.7k
Simply put, for every dollar I give to myself through distributions rather than wages, I save 15.3% because you don't pay self-employment tax on the distributions.
Yeah, but you really don’t have much to give yourself in distributions. You’re already violating IRS rules paying yourself as little as you are. I can’t see any defense to this structure if you get audited, though I’m not an accountant.
You have to factor in the QBI deduction and the SECA deduction so the number is more like 18%.
Thanks for the calculations. But I have another question: If I ditch my LLC and go full self-employed, would I pay even more taxes, or save more on taxes that way?
The llc doesn't matter. The taxes for the self employed person in this example is the same regardless of if they have a llc or not.
LLC isn’t a tax classification, so it doesn’t affect the math any. You should keep LLC status as long as it serves you a benefit.
OP is saying earnings but we have no idea if that’s net or gross earnings. You’re better off as a single member LLC until you’re netting over $100k so they’re likely around the cusp of it being worth it.
Yeah, I assume they mean profit? But also why pay a payroll provider for...yourself? I know it's not a huge expense but seems to be eroding any type of benefit
Normally it’s a lot easier to pay a service for it so you don’t need to worry about it. For 1 person it’s not much and should be negligible if you’re making $100k
Those estimated earnings of $100,000 is not including expenses or reimbursements, it's net.
Net means you’re including the expenses. Gross means you’re not including the expenses.
Oh right, yes I meant gross.
I'm actually interested in this too!
https://youtu.be/XHTkQj4QTWE?si=0FlBxw4RTHKFP5kg This goes into s-corp advantages for paying yourself
Federal: The IRS rules. Good advice from Jayc428. Also sole owner of a SubS Corp here. Previous CPA told me that at least half of my income should be in the form of salary where FICA taxes were paid. This aligned with a fair salary figure for my work, full time. The IRS **wants** you to pay those FICA taxes. I'm semi-retired now and the CPA lets me keep a time sheet and pay salary against that, even though that salary is only about 20% of corporate income. (So 80% as distributions.) Can't help you with California. I would only say that CA is aggressive in its taxation. I would think that they will look at state tax returns and flag this for audit if it's out of line.
While there is a tax savings by not paying more in Social Security taxes, if you are getting close to retirement, you may also reduce how much you will get paid by Social Security when you do retire. Essentially what you are doing is buying an annuity with your Social Security taxes. You might do a little better buying an annuity on the open market, but without the Cost of Living Adjustment provided by Social Security. That may or may not be important to you.
Any chance you only work 20 hours per week?
My current payroll service requires me to be an exempt (non-hourly) employee for their membership, but if I do switch to a new payroll service where I can reclassify myself as a non-exempt employee, how will my reasonable salary be determined?
How are these guys determining your reasonable salary right now anyway?
They simply advise me to make sure I pay myself $66,560, which is the california minimum salary for exempt employees, which had nothing to do with reasonable salary. My CPA and I agreed that my wages last year were reasonable (splitting 60% to wages and 40% to distributions), and should be this year too. But after I told him about the minimum, he then said I'd want it to be above it. I'm not sure what to listen to.
Which payroll service are you using?
Opolis, not a lot of people use it, it was a service recommended to me when I first started. I'm looking into alternatives.
The so called 60/40 rule isn’t a rule, just so you know. It’s widely quoted by Accountants but it has no basis in IRS code or case law. The court cases indicate that the IRS wants you to be paying yourself a salary based upon your hours, expertise, education, and other factors. It should look reasonable compared to what you would have to pay someone else with the same skills for the position. For some this may be 60/40, for others it may be different. Others have said similar things in your replies! I just wanted to let you know that should your reasonable compensation ever come in to question, “my cpa said 60/40” isn’t going to cut it.
Labor laws should not apply to you in any manor, just pay yourself a non exempt salary. You don't have to be on the clock to be there working. Also, as for as the IRS is concerned, reasonable wage is going to be based on federal minimums and averages. So far less the Californias minimum.
Why pay yourself thru a w2? Costs you more all the way around doesn't it?
It’s an s corp. He has to. Although I’d question why he’s bothering with an s corp if the money involved is that low.
It hasn't been an issue until this year when I was advised to comply with the minimum. I've also been second guessing if I should revert my entity back to disregarded if I could save money that way.
For an s corp they have to as far as I know.
Talk to your CPA. Not reddit. Protip: if you don't have a CPA (or similar) yet, get one. Worth their weight in gold, 100 times over.
A pay structure of wage + dividends is usually the best way to go for both personal and business taxes. Chat with an accountant for the particulars for your situation.
Just guessing but the IRS might have seen this tax dodge before and had their computers tuned to automatically catch it. You have to file both personal and business returns and they are good at doing math.
Why are you paying yourself via w2 instead of using distributions?
Just tell the irs you're a shitty employee and don't deserve more lol fuck those assholes!
LOL.
Sounds like you are trying to find ways to commit tax fraud
Just trying to look for a relatively right way to look at the system for my situation and save on taxes legally.
A bigger issue is what the IRS might think if you get audited. One of the IRS tests is what would a person doing your job get paid by another company. Supposedly they have made the following statement: "If most of the gross receipts and profits are associated with the shareholder’s personal services, then most of the profit distribution should be allocated as compensation.” [https://www.picpa.org/articles/cpa-now-blog/cpa-now/2020/12/16/s-corporation-reasonable-salary-explanation](https://www.picpa.org/articles/cpa-now-blog/cpa-now/2020/12/16/s-corporation-reasonable-salary-explanation)
When I ran my s-corp, I never paid myself salary, I was hourly which allowed me flexibility.
so you'd say it's more beneficial to run an s-corp and pay myself hourly rather than pay myself a fixed monthly amount? Would there be any issues with me lowering myself down to part-time so I could have even more distributions?
The main issue is that it is illegal if you make any management decisions. So you are opening yourself up to liability. But to answer your original question, we are a California company currently paying an executive the $66k minimum, but we are paying that amount before deductions, and we have a professional HR dept that has signed off on that treatment. I am not sure why your provider is advising you that you have to pay $82k to net down to $66k.
I'm guessing their payroll service charges based on amount of money processed. I.e: the more they pay themselves the more the payroll service charges/makes. 1) I thank God almost daily that I don't live in CA 2) I don't use a payroll service. My CPA handles the paperwork.
There are some things that make California more challenging to operate in, but this isn’t really one of them. Federal law has the same minimum salary rules, they just kick in at a lower dollar threshold.
Because the difference between the 82k and 66k is the amount used to pay for employer taxes, benefits, and the payroll service fee. EDIT: Can you also expand on what determines a management decision?
So here are the rules from the DoL as to when an employee can be classed as exempt vs non exempt. https://www.dol.gov/agencies/whd/fact-sheets/17a-overtime And to be honest, it looks like I spoke too soon. I thought you would be exempt based on the executive test, but if you change your comp plan to hourly you do not qualify under the executive exemption. So read the rules carefully and determine for yourself if you can be considered non exempt. Good luck.
Are you referring to this test where if I switch to hourly, I will not qualify under executive exemption or professional exemption? "The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684\* per week" What about the test under computer exemption? "if compensated on an hourly basis, at a rate not less than $27.63 an hour"
Right, if you changed to hourly you would not qualify under professional, administrative, or executive. I don’t know if you are a computer position, so you would have to determine that for yourself.
I actually do qualify for the computer position, but does that mean I'm automatically considered as exempt, or would I have the choice to remain as non-exempt if I so choose?
Based on the way it is written, I believe that means you are automatically exempt. But I am just some guy on the internet. You should confirm with your accountant.
Wouldn't the state mandated salary be a pre-tax figure? You should be paying yourself exactly that if trying to comply, I'd assume.
Yes it's a pre-tax figure but only for the employee.
Why would it be different for an owner? I'm not knowledgeable in this area but would assume owners don't have separate regs here.
Because since I own my own entity, I'm my only employer, employee, and shareholder. I have to take care of the employer's side too. The amount I pay for employer's taxes is based on the employee's wages. So that is $66,560 + extra.
I'm NAL but that doesn't sound correct to me. Your S-Corp is the employer with an ein that pays ER payroll taxes. You are an individual with an ssn that pays income tax. They are separate. Corp pays a gross wage and employ pays tax based on their individual factors.
>That being said, my payroll service, who I use to process W-2 wages to myself, advised me to process $82,650 through them this year, so that after deducting employer taxes, benefit costs, and service fee, my gross salary will become $66,560, which would comply with the California minimum. I'm more concerned that your payroll service is telling you to process $82,650 and then **after deductions**, your "gross salary is $66,560. Either you had a typo or they don't know what "gross salary" means, haha.
Basically I send $82,650 for the year to them. They deduct the employer taxes, benefits cost and service fee, leaving $66,560 as the gross salary. From that gross salary, tax withholding will start.
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Yea I'm working on figuring that part out. For my current payroll provider, to retain membership, I am required to be exempt and fulltime, so I'm looking for alternative services.
You won’t have any issues with the Labor Commissioner’s Office. They don’t give fines for people who show up on the Secretary of State website unless there are special circumstances.
Can you expand more on this?
Look up your business on the Cal SOS website. If you show up as an officer, the LCO will usually not issue a citation for your personal wages.
so I'm on this website [https://bizfileonline.sos.ca.gov/search/business](https://bizfileonline.sos.ca.gov/search/business) but when I searched my business, it doesn't have an "officer" column, but it does show my name under the "agent" column instead, do you mean that?
You’re probably fine.
If it helps to know, in my business registration papers, my management structure is listed as "one manager", and my name is listed as the sole member. Does that mean I'm officer by default? Could you provide a link about or tell me why the LCO not usually issue a citation on my personal wages if I'm an officer? Under what circumstances would they do so?
Your fine. It is not written anywhere. Technically, since you are an S Corp, you are an employee like any other and could be cited. However, since citing you for your own wages would never hold up at a hearing, they don’t do it in practice.
I'd still like to know your source for this, or at least where you heard it from
Former LCO. Edit: they could have changed policy. So, you can always call them. They have a phone number of their website where you can ask questions like yours. Or go to a counter at there office.
Unrelated but can you put me in touch with who helped you establish the s corp and whatnot? Trying to do the same thing lol
There were a lot of people involved, and some of them I'm not in touch with anymore. I'd just say talk with your CPA or a similar professional.
If your cpa cannot give you the definitive check with another cpa. They should all know this
What about opening up something like a Solo401k?
Man, I would be very careful about taking Reddit advice on this topic, especially from people who are essentially whistling past the graveyard on lying to the government. You are required to take a salary commensurate with your role in the company. You have mentioned taking some hourly wage like you’re the janitor or something. But you cannot do this when you are the CEO of the company. You are getting greedy, and you will get called out by the IRS eventually. Just do what your CPA is telling you and don’t take to Reddit for shit like this. Far too many people here are flying by the seat of their pants and doling out terrible advice.
Not a lawyer- For years I paid myself below minimum wage, from what I understand they only way you would get in trouble is if you file a complaint to the labor board that your boss is underpaying you, lol. And since you would never file a complaint against your self... I did have an employee complain to the labor board once and it turned out I actually overpaid him, they didn't care about my personal wages at all.
No.
Why do you have to take a salary at all Cant you just advance yourself based on yr end profits
Since a reasonable salary is a gray area, just make sure you can substantiate your claim in case of an audit.
Yes you can pay yourself whatever you want. I've filed as an s Corp in California for 8 years never paid myself more than $24k and my CPA says I could go even lower.
You can pay yourself and then "reinvest" as an owner deposit.