TAX Question: Implications of paying self dividends only

[thefed]

Say I were to incorporate my business, and pay myself only dividends and no w-2 wages.

Is this possible? would this not effectively take advantage of the lower dividend tax rates for federal returns? What implications are there on the state and local level?

Just bumming out over the $$ I have to send my poor uncle sam in april

[thefed]

Quote:

Originally Posted by thefed Say I were to incorporate my business, and pay myself only dividends and no w-2 wages. Is this possible? would this not effectively take advantage of the lower dividend tax rates for federal returns? What implications are there on the state and local level? Just bumming out over the $$ I have to send my poor uncle sam in april

maybe i should clarify....

i know in an s-corp, which i am considering, that you're supposed to take a 'reasonable salary'. Of course REASONABLE is debatable to no end, but I'd take some salary that i can prove is reasonable


How then, would the leftover profit (disbursed as a dividend to all owners...ie ME) be taxed? I know it is not subject to payroll taxes (ss and medi)...but what about the state level? anything different than regular income on either state or federal level? i thought i read somewhere that dividends are not taxed in the same way regular income is (aside from not being subject to payroll taxeS)

Thanks!

[Meadbh]

I do this to great advantage. But, as we live in different countries, YMMV.

[chrisdut]

I am not an accountant, but i stayed at a Holiday Inn Express last night...so I will take a stab. I think you will find that under a S-corp, what you refer to profits (to be disbursed as a dividend) will not be taxed as a dividend. Your profits will be taxed the same in the same manner as W-2 income, except it is not subject to social security/medicare taxes. One benefit of a subchapter S-corp is that you may take a section 179 deduction each year. If I were you though, I would talk to an accountant.

[thefed]

Quote:

Originally Posted by chrisdut I am not an accountant, but i stayed at a Holiday Inn Express last night... One benefit of a subchapter S-corp is that you may take a section 179 deduction each year. If I were you though, I would talk to an accountant.

again, i might be wrong (usually am when it comes to taxes!!), but i thought even a sole prop can take a 179 deduction?

[chrisdut]

Quote:

Originally Posted by thefed again, i might be wrong (usually am when it comes to taxes!!), but i thought even a sole prop can take a 179 deduction?

I know nothing about sole props. It may be that you can take a section 179 deduction with it.

[Niko]

Quote:

Originally Posted by thefed maybe i should clarify.... i know in an s-corp, which i am considering, that you're supposed to take a 'reasonable salary'. Of course REASONABLE is debatable to no end, but I'd take some salary that i can prove is reasonable How then, would the leftover profit (disbursed as a dividend to all owners...ie ME) be taxed? I know it is not subject to payroll taxes (ss and medi)...but what about the state level? anything different than regular income on either state or federal level? i thought i read somewhere that dividends are not taxed in the same way regular income is (aside from not being subject to payroll taxeS) Thanks!

You're absolutely right that the salary must be fair and reasonable. I understand the Service is ramping up audits of S-Corps who pay no or low salaries to the owners. You should make sure to meet with a CPA to determine the most tax-advantageous way to set up your salary/distributions while complying with IRS regs. The IRS has listed factors they apply to determine whether a salary is reasonable.

My understanding (confirm with your CPA before relying on me!) is that the remaining distributions avoid FICA and Medicare but are still treated as ordinary income. Essentially, the owner's share of the corporate income and loss pass through to the owner and is reported on the shareholder's K-1, and he/she reports it as ordinary income on their personal tax return. There may be some limited circumstances in which a distribution can be treated as a capital gain.

That sound right folks?

[Martha]

It is almost impossible for a small service business such as yours to get away with paying owners who work in the business anything other than a salary.

Anyway, an S corp "dividend" is really a distribution and is not a qualified dividend and you would pay ordinary income taxes on it, even if it was allowed as your salary was reasonable. So you only save the FICA.

Don't get greedy with the tax man.

[thefed]

Quote:

Originally Posted by Martha It is almost impossible for a small service business such as yours to get away with paying owners who work in the business anything other than a salary. Anyway, an S corp "dividend" is really a distribution and is not a qualified dividend and you would pay ordinary income taxes on it, even if it was allowed as your salary was reasonable. So you only save the FICA. Don't get greedy with the tax man.

Why do you say it's almost impossible to 'get away with' paying owners a salary less than the company's profits, and the rest in a disbursement?

In my case, I average about $100/hr after expenses. To me, that is an UNreasonable rate for someone to be paid for the work I do. $20/hr is more reasonable, imho. so i figure it would make sense to pay myself wages of $20/hr...and take the rest as dividends


what am i missing?

[retire@40]

Quote:

Originally Posted by thefed Why do you say it's almost impossible to 'get away with' paying owners a salary less than the company's profits, and the rest in a disbursement? In my case, I average about $100/hr after expenses. To me, that is an UNreasonable rate for someone to be paid for the work I do. $20/hr is more reasonable, imho. so i figure it would make sense to pay myself wages of $20/hr...and take the rest as dividends what am i missing?

If it's so unreasonable, then how come the marketplace is willing to pay you an unreasonable amount?

[thefed]

my understanding is that "reasonable salary" should compare to what any other similar business at arms length would pay an employee (not an owner) working the same position,the same amount of hours, with the same skill set, background etc....

My market research tells me that $$ amount is in the $15-20/hr range.