Business owner as employee.


F

falcro

Hello

I am wondering about treating myself as an employee in my soon to be
business. Does this work? To do all my books just like I had an
employee except this employee would be me.

Would I have to do all the deductions and everything just like I would
with any employee? Is there any benefit to doing it this way. It seems
like it might make profit and loss easier to see or figure out and
keep finances more compartmentalized.

Thanks.

Richard
 
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W

Wayne Brasch

falcro said:
Hello

I am wondering about treating myself as an employee in my soon to be
business. Does this work? To do all my books just like I had an
employee except this employee would be me.

Would I have to do all the deductions and everything just like I would
with any employee? Is there any benefit to doing it this way. It seems
like it might make profit and loss easier to see or figure out and
keep finances more compartmentalized.

Thanks.

Richard
As the sole owner of an unincorporated business, you can not pay yourself a
salary and have the business deduct it as an expense for accounting nor tax
purposes. What you pay yourself is considered an owner's withdrawal which
reduces your equity in your business, but is not an expense of the business.

Wayne Brasch, CPA, M. S. Taxation
 
R

Road Atlas

Does your comment also apply to Sub-S?

Another Question: Assuming a Sub-S, how and when do you pay the social
security tax (if ever) on your "salary"? I am considering the same thing as
the original poster, and I will using an outside payroll service, and I
planned to just add myself to the payroll for my base pay, then do bonuses
to take out more money (if things go well). But I haven't figured out the
Social Security/Medicare thing tax thing. Surely that cannot be avoided just
becuase you are a Sub-S.
 
D

David Jensen

In alt.accounting said:
Hello

I am wondering about treating myself as an employee in my soon to be
business. Does this work? To do all my books just like I had an
employee except this employee would be me.

Would I have to do all the deductions and everything just like I would
with any employee? Is there any benefit to doing it this way. It seems
like it might make profit and loss easier to see or figure out and
keep finances more compartmentalized.
If your business is a corporation, you can employ yourself. Yes, you
will have to pay FUI and SUI. In a sole-prop, the Draw is the equivalent
to a paycheck, so there is no difference in ease of tracking profits.
 
R

Ronald Richards

In a sub-s the tax code reads "The President of a closely held thinly
capitalized sub-s corporation should be paid what is reasonable and proper".
Most people thinks that means take it all as disribution and pay themselves
nothing in W2 wages and it cost them nothing at the corporate level. The IRS
has interpreted this to mean a 50-50 split between wages and distribution.
 
W

Wayne Brasch

Road Atlas said:
Does your comment also apply to Sub-S?

Another Question: Assuming a Sub-S, how and when do you pay the social
security tax (if ever) on your "salary"? I am considering the same thing as
the original poster, and I will using an outside payroll service, and I
planned to just add myself to the payroll for my base pay, then do bonuses
to take out more money (if things go well). But I haven't figured out the
Social Security/Medicare thing tax thing. Surely that cannot be avoided just
becuase you are a Sub-S.






yourself
As the owner of a Sub S corporation, you may pay yourself a salary with all
the appropriate taxes withheld from it by your payroll service. The
corporation can deduct your salary as an expense.

Wayne Brasch, CPA, M. S. Taxation
 
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A

Allan Martin

Ronald Richards said:
In a sub-s the tax code reads "The President of a closely held thinly
capitalized sub-s corporation should be paid what is reasonable and proper".
Most people thinks that means take it all as disribution and pay themselves
nothing in W2 wages and it cost them nothing at the corporate level. The IRS
has interpreted this to mean a 50-50 split between wages and distribution.

The 50-50 split is urban legend. Reasonable and proper does not equate to
any percentage. What you would have to pay an unrelated third party in wages
to perform the same duties would be considered reasonable and proper. Also
factors such as number of other employees working for the corporation as
well as the amount of capital invested is also a determining factor.
 
U

Uncle Matt

You guys have branched off and missed the scope of the question...trying to
avoid Soc Sec tax.

If you pay yourself in salary, you (the individual) and the company pay Soc
Sec taxes on that money. If you take it as a dividend, you don't pay Soc
Sec tax. Why not take as much of a dividend as possible and as little
salary as possible to avoid (or at least minimize) the Soc Sec tax. Now, I
guess you must also weigh the impact of losing the dedcution of the salary
from the company's income taxes (since dividends are not deductible) vs. the
Soc Sec tax savings, also noting that you will be paying taxes on the
dividends as the individual.

Someone please tackle a specific example (I can't figure it all out):

Let's say my Sub-S can pay me a total of 100K this year, and my company is
90% captitalized (bank loans + seller held financing) at 1.5 million
dollars. How best to pay myself this money to cost the absolute least taxes
(all kinds) possible?
 
B

Bob

Uncle Matt said:
You guys have branched off and missed the scope of the question...trying to
avoid Soc Sec tax.

If you pay yourself in salary, you (the individual) and the company pay Soc
Sec taxes on that money. If you take it as a dividend, you don't pay Soc
Sec tax. Why not take as much of a dividend as possible and as little
salary as possible to avoid (or at least minimize) the Soc Sec tax. Now, I
guess you must also weigh the impact of losing the dedcution of the salary
from the company's income taxes (since dividends are not deductible) vs. the
Soc Sec tax savings, also noting that you will be paying taxes on the
dividends as the individual.

Someone please tackle a specific example (I can't figure it all out):

Let's say my Sub-S can pay me a total of 100K this year, and my company is
90% captitalized (bank loans + seller held financing) at 1.5 million
dollars. How best to pay myself this money to cost the absolute least taxes
(all kinds) possible?

considering "all kinds of taxes" it's more complicated than that. There are
limits on funding retirement plans with scorp vs sole proprietor, also there
are state levied franchise taxes on scorps, and with an scorp in some
states you must pay FUTA and SUTA even if you are a single owner, that's not
the case with a plain Sch. C filer. If you have a business and are
considering incorporating talk to a qualified local accountant
 
D

David Jensen

You guys have branched off and missed the scope of the question...trying to
avoid Soc Sec tax.

If you pay yourself in salary, you (the individual) and the company pay Soc
Sec taxes on that money. If you take it as a dividend, you don't pay Soc
Sec tax. Why not take as much of a dividend as possible and as little
salary as possible to avoid (or at least minimize) the Soc Sec tax. Now, I
guess you must also weigh the impact of losing the dedcution of the salary
from the company's income taxes (since dividends are not deductible) vs. the
Soc Sec tax savings, also noting that you will be paying taxes on the
dividends as the individual.

Someone please tackle a specific example (I can't figure it all out):

Let's say my Sub-S can pay me a total of 100K this year, and my company is
90% captitalized (bank loans + seller held financing) at 1.5 million
dollars. How best to pay myself this money to cost the absolute least taxes
(all kinds) possible?
Legally, you will have to pay yourself in salary what you would pay a
manager to do the job you are doing for the business.
 
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G

gerald

I'm not an account. I own a sub S. You pay yourself what is
reasonable and proper. You don't you are looking for problems. The
Fica avoidance is well known, and duly noted by IRS.

You also cannot pay yourself too much, if you are trying to avoid
corporate tax. C corp.
 
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