The Day Series: The Day I let my first employee go
thedayseries.com
thedayseries.com
Is there any advantage at all to doing it this way?
On another note, if you spend a lot of time during your start-up years (say the first three) on stuff like this you are likely doing something wrong. That sort of number wizardry only pays off when the amount of turnover starts to be significant enough to look at what you're going to do with the excess money. Hardly any start-up finds itself in such a luxurious position.
In the success or spectacular failure case, I can't see that it gives any advantage. (In fact, in the losing case, you would presumably have to pay taxes on the salary you never received and then might get different/worse tax treatment on the bad debt. Even in the winning case, you'd pay payroll taxes and FICA on the "phantom" salary.)
Their salary was $100k, of which (say) $80k was returned as a loan from the founder to the company.
This lets the company book $100k of costs on a net cash outflow of $20k. Costs are applied before calculating profit and therefore before calculating taxation due. At a corporate tax rate of 20% that would be worth $16k more than the tax deduction due from paying salaries of $20k.
Tax losses can be deferred until you make a profit in most tax regimes so that $16k will be held over until you need it to avoid paying taxes on the first $80k of corporate profits no matter when they happen.
It may also be possible to essentially sell tax savings to other companies under some circumstances (usually when winding up a company).
Overall this scheme would probably cost money as employment taxes would be due. But that can vary depending on other tax breaks, especially in progressive taxation systems. You may also be able to do something interesting with loan interest repayments which are often subject to tax breaks. Tax codes for Western countries are huge and full of interesting possibilities!
What I don't get is, if you pay yourself $100K, aren't you personally taxed on your 100K income?
Or, will you claim you only had a 100K - 80K = 20K income on your personal taxes? I would think the government would try to match up the $100K company expense with a $100K personal income (and if they don't match, audit you).
I'm actually really curious if you can pull this kind of thing off.
Ideally, take what you can to pay your mortgage. Put that on the books. Spend time getting profitable instead of balancing the books. If you become profitable, or get a nice round, it'll all work out :)
This may be less than the expected saving from avoiding corporate income tax due to:
- Tax free personal allowance (soon to be $15k for the UK).
- Tiered rates of personal income tax (for example a 10% lower band up to a threshold).
- Deductions or grants for persons working in enterprise zones/for small companies/for start ups/for technology companies/in strategic industries which are only reclaimable once personal income crosses a threshold. (Common in places like Northern Ireland.)
- Employees and employers not in the same tax region, allowing for {evasion|avoidance} schemes.
The whole thing gets really complicated very quickly, and if your two man startup is engaged in tax manipulation to that level you are probably missing the forest for the trees. If a $20k tax saving distracts you from a shot at a $1bn market you are doing it wrong.
(Unless you know a huge check is arriving next quarter, or some other special circumstance applies.)
Heh.
been fixed. thanks.