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Thread: Business question
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Jan 19, 2006, 11:09 #1
Business question
Okay - my understanding is if you incorporate you have to pay yourself some sort of a monthly salary. How does this work if you don't have a constant stream of work but just get work here and there?
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Jan 19, 2006, 11:22 #2
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It's not quite that simple. If you incorporate as a corp, you dont need to give yourself a monthly salary. You can pay a distribution to yourself whenever you like, or when cash permits. However, if you do this you might be subject to a self-employment tax and that could defeat the tax-benefits of incorporation in some cases. If you become an LLC, the rules are slightly different but a similar dynamic applies. If your business starts making sigificant revenue and you are able to pay yourself a salary, there are some conditions where you are obligated to do this. However, this usually doesn't apply to a brand new business without enough cashflow to cover a reasonable salary for the owner.
So, it's not necessary to pay yourself a monthly salary but it is generally wise to do so. The best thing is to consult with an accountant and see if your projected cashflow is enough to make a corp/LLC beneficial. You should be able to take a guess at your revenue for the first 2 years, and they can tell you where you stand.The fewer our wants, the nearer we resemble the gods. — Socrates
SAGEWING LLC - QUALITY WEB AND MOBILE APPS. PREMIUM OUTSOURCING SERVICES.
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Jan 19, 2006, 11:23 #3
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You don't have to pay yourself a monthly salary at all. You can pay yourself every day or only once a year, the gov't doesn't care. They only care about about how much the company made and the company's expenses so that they can tax the corp and how much you drew as a salary so that they can tax you.
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Jan 19, 2006, 11:35 #4
ahh okay thanks guys.
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Jan 19, 2006, 11:43 #5
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Not true. There is a whole body of law around this kind of compensation and to say that the government 'doesnt care' is really dangerous.
I agree it doesn't have to be monthly (it could be quarterly or weekly) but we are talking about the concept of being a full-time-employee with PAYROLL or not, and it's absolutely wrong to say that the government 'doesn't care'.
They care, and they care enough to put huge penalties for violations like innapropriately low salaries, failure to pay self-employment tax, etc. There are many things to consider and lots of rules.
In addition, your comment about them simply wanting to know the income/expenses so they can tax what you took out isn't right. An s-corp, for example, will get taxed on it's net profit regardless of disbursement under many circumstances (as retained earnings). Otherwise, people would pay themselves a tiny salary and simply accumulate tax-free earnings in the corp.
I think that people should be very cautious when giving tax advice online, and your comments seem a little irresponsible.
Bottom line: same as always, get a CPA and only trust them.The fewer our wants, the nearer we resemble the gods. — Socrates
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Jan 19, 2006, 11:51 #6
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Like was mentioned, I would seek some professional advice regarding your specific situation. But in a nutshell, you should understand there are two ways to pay yourself when you incorporate (from a C-corp perspective). First is through compensation as an employee of the company. Second is through dividends without being an employee.
The big difference is how the money is taxed. As an employee of the corporation, salary paid will only be taxed once. The company counts salary as an expense, thus reduces the corporate taxable income and then you report the wages on your personal taxes. If you are not an employee and the corporation pays you money, it is considered a dividend. In this case, the corporation pays tax on this money, and then you pay personal taxes on that dividend income.
Deciding what makes sense in your situation should be discussed with an accountant or someone who specializes in tax situations.Generation X Finance
Helping a Unique Generation Achieve Financial Independence
Financial Planning writer at About.com
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Jan 19, 2006, 11:58 #7
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Jeremy - Your comments are helpful but my guess is that DoobyWho would probably start with a pass-through scenario under subchapter S or an LLC. I am considering moving from S to C with my corp, to take advantage of some additional tax advantages related to employee benefits. I've found that it's surprisingly different and even more confusing!
The fewer our wants, the nearer we resemble the gods. — Socrates
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Jan 19, 2006, 12:04 #8
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I agree, a new company can likely benefit from the pass-through taxation, since new companies typically show a loss. I personally typically go for the C-corp right out of the gate though, because if my business isn't making money, then I'm probably not making much money, so taking the loss on my taxes doesn't make much of a difference. But for someone else with another stream of income, this could be a very bad decision. Which again, is why it is so important to get professional advice from someone who can help based on your whole situation
Generation X Finance
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Jan 19, 2006, 13:14 #9
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As the only employee of my corporation I don't pay anything beyond personal income taxes on the money I draw down from the corporation.
No matter what business you run, or how you choose to structure it, you're always going to need to get advice from a professional in the field but at the end of the day I (and I stress the word I) don't draw a regular salary (as in I pay myself 2k a week every week no matter what). I take out money on a regular basis to pay the bills, keep the rest in my corporate account until tax time, determine how much to pay myself for the entire year to minimize personal and corporate taxes and then just divvy up the rest on the last day of the corporate tax year in one lump sum.
At the end of the year, I pay one lump sum on all the money I and my corporation earn over the course of the year minus some arbitrary quarterly installment payments that the gov't makes me pay based on last year's income.
I'm sure the US is different, and the original poster may be from Mongolia for all we know.
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