Discussion:C Corp Newbie Re: Wages or Dividends?
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Discussion Forum Index --> Tax Questions --> C Corp Newbie Re: Wages or Dividends?
Ebservices (talk|edits) said: | 1 May 2009 |
| Not sure how to discuss this w/ new C Corp client. For the past 6 years, they've been mixing all of their personal expenses w/ their business expenses. They are not paying themself a wage and are allocating everything to Owner's Contributions & Owner's Draw for their personal expenses paid by the company. I know the S-Corp rules, but is a C-Corp owner required to pay themself a wage? Obviously, the mixing personal w/ business is a huge wrong that needs to be righted =). | |
| 1 May 2009 | |
| Actually the IRS might be just as happy to treat all those personal expenses paid by the corporation as constructive dividends; it's to the stockholder's advantage to pay himself a salary, which is deductible by the corporation. Dividends are taxed twice -- at the corporate level and again at the stockholder level. The more common issue in a closely-held C corporation is excessive salaries, rather than not enough salary (the opposite of the S corporation issue).
Of course, if the stockholder is performing services for the corporation, he and the corporation are liable for employment taxes (FICA, FUTA, SUI, etc.) to the extent the corporation has the ability to pay him a salary (which it presumably does, if it can pay his expenses and "draws"). | |
Bill Brown (talk|edits) said: | 1 May 2009 |
| The usual problem with C-corp's is shareholder employees who pay themselves too much salary and fringes for the service they provide to the corporation. I'm not aware of anyone being audited and assessed back income taxes for too little compensation to a C-corp employee-shareholder. | |
Bill Brown (talk|edits) said: | 1 May 2009 |
| KatieJ makes a good point. Those payments by the C-corp of the shareholder's personal expenses are either compensation or dividends. Either way, the shareholder has taxable income. | |
Ebservices (talk|edits) said: | 17 May 2009 |
| What about the contributions from the Shareholder? They did contribute quite a bit of cash as well. Would this offset the draws & the balance would be cosidered compensation...or should I consider all draws compensation? Thanx so much! | |
| May 17, 2009 | |
| After initial capitalization, you could consider their money paid in as loans, and use the payments back out as an offset. But I'll lay big money that there's more paid back out to them than paid in after several years. If not, you have no problem, other than profits that are double taxed. Why not elect S? | |
Nbrcruncher (talk|edits) said: | 17 May 2009 |
| If the corporation made $50,000 or less why would not the owner be better off taking it out as a dividend rather than salary? 15% corporate tax rate and zero dividend tax rate for 2009 versus 15.3 percent payroll tax rate and whatever his 1040 taxes would become? | |
| May 17, 2009 | |
| Other than that he's required to pay salary for services, nothing. | |
| May 17, 2009 | |
| You can't treat contributions as loans just because that results in a lower tax bill.
Paying social security tax earns social security credits, which may result in a higher benefit; paying corporate income tax doesn't buy anything. It would be a mistake to give that up without some serious math to figure out it isn't worth it. The employer payroll tax is also deductible, the corporate income tax isn't. | |
Ebservices (talk|edits) said: | 17 May 2009 |
| Yeah JR, you're right after 5 years they show a balance of a little over $30k more taken out of the company. They show a loss this year with gross receipts of $510k. We do plan to elect as an S-Corp as soon as possible. So how much do I show as a dividend? The gross money drawn or the net balance of draws/contributions for 2008? | |
Ebservices (talk|edits) said: | 18 May 2009 |
| Looks like their former accountant accounted for the balance of draws at the end of the year as a Loan to Shareholder on Schedule L of the 1120. Sounds like a good plan to make this easier? | |
| May 18, 2009 | |
| Had to be if there's no profits. No need for salary OR dividends in that case. And don't elect S until you've used up the losses. | |
