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Comment by vasilipupkin | Hacker News Reader

I am confused. If you put your bonus into a corporation, you will have to pay tax twice, the corporate tax and your personal tax. And if your corporation is an LLC, it all flows through to your personal taxes anyway. So, I don't see how you shelter this just by putting into a corporation.

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Salaries (and bonuses) are considered expenses for the company and will be tax deductible.

I believe the example was that you may as a contractor (with your own company) receive a bonus to your corporation and be able to offset taxes for another 11 months compared to having the bonus paid out personally.

Working as a contractor for your wholly-owned company would never pass muster with the IRS. You might be able to avoid audit for a little while, but when this catches up to you it will be a huge mess. They would recast the transactions (they can do this) and you'd end up owing a ton of tax and penalties.

Source: I'm a (former) tax lawyer.

So you're not allowed to be self-employed by a corporation that you own yourself in the US? I thought this was pretty normal practice for contractors, especially in IT.

I own my own company where I do contracting work for clients and the income goes to the company. I might have misunderstood or phrased myself badly above.

You’re allowed to be employed by the company you own as an employee, but not as a contractor. You’re a “contractor” from the perspective of your clients, but to your own company (if you made one), you’re an employee.

I think that he meant that you would be an employee of the corporation. The corporation would then be the contractor for someone else.

I'm still not convinced that this works, but that is how I read it.

That's why you pay yourself a small, but not alarmingly small, salary W2 and take the rest on your K1 or such.

The IRS routinely audits people for not paying themselves a market salary in order to shift income to another category. So in playing this game, you have to factor in the likelihood of audit, cost of defense, and cost of penalties and interest that could be assessed.

In the hypothetical scenario of the op, he has 100k as a salary. Which the IRS would not ever likely contest. Since it gets you close to paying out your full ss tax anyway. (since ss tax cuts out somewhere around 115k or so).

And it is also enough for almost any profession. Even CEOs of small companies earn in that range.

If there are job listings in your area for that salary it's market. I pay myself $80k. When I get audited it won't be for that.

no but instead of taking out the money to pay yourself, you just buy things as assets of the company therefore reducing tax exposure.. at least thats the way I have heard of.

You have to prove to the IRS that the asset is used 100% for work. If it's not 100%, you have to show documentation for arriving at that specific interpretation of a split. That's why buying a whole house to live in and writing it off won't work, but claiming 10% of the square footage of the house that's used for business (and business only) will.

Unless you feel very comfortable with IRS regulations and annual changes in them, you have to pay a business CPA to run the numbers, and in many cases the added complexity is just not worth it.

This is called "piercing the corporate veil" and will not only get you in trouble with the IRS but will also mean if you're ever sued you won't get any of the normal protections to your personal assets that you would expect from doing business as a corporation.

Protecting yourself in a single owner corporation or LLC would require extraordinary discipline and bookkeeping. The protections offered by an LLC or corporation to a single owner are generally overstated.

In other words, the corporate veil will be pierced either way.

It's not that bad. I keep a separate credit card, laptop, and office for company use.

assets are not expenses. (that's why it called assets)

some assets can be depreciated over years. some small assets (like printer, laptop) - can be written off in one year... but amount you would save on it is negligible.

Asset purchases are expense. It's a way to get cash out of a company to avoid paying taxes.

Money launderers will sell themselves electronics at a 5-10x markup on Amazon, for example, to get the cash out.

This is Cost of Goods Sold (this is an expense)

To get there you need to acquire Goods to Sell first.

Either way, it is not applicable to what parent was saying. What typically people mean in these situations is that "I can buy a car in the name of my corporation tax free, I can replace home AC unit in the name of corporation tax free" etc. And that is very wrong.

(I am here talking about accounting meaning of word "expense")

This is yet another barrier to entry for the working class. If the poor try to use tax loopholes they get nailed. The rich can afford tax lawyers to make sure they're doing it right.

For low to middle incomes there's rarely a case where itemizing beats standard deduction.

yes, but if you have your own corporation, unless it's an LLC, then you will have to pay corporate tax on that income in addition to personal income. And if it's an LLC, there is no difference.

^^^ this. In fact in the US the IRS will flag abnormally high salaries for small businesses (millions per individual) if no or very few dividends are paid out because income tax is less favorable to the government in the total amount the IRS receives when looking at multi million dollar salaries. Beyond the first $110kish FICA stops making a dent as social security caps out. I'm sure there are possible loopholes for very wealthy individuals but this article doesn't detail them and I'm not familiar with them either. This is the opposite of other places like Sweden where high income tax and low business taxes make dividends very favorable, and the tax authorities there will question paying dividends at too low of income levels.

People often forget about S-Corps. As the owner you W-2 yourself, then what is "left over" is a dividend. Since an S-Corp is a pass-through entity, you don't pay corporate taxes, and aren't getring the C-Corp double tax on your dividends.

On the dividend, you don't end up paying toward FICA. Effectively saving you up to 15.3%.

IRS rules stipulate you have to be paid a "reasonable" compensation, which most accountants I've talked with define as within 30% of average wage for your "profession".

So the average programmer US wise makes something like 90k I believe (haven't checked in a few years).

You are saying if you ran a 1 man SAAS app and made 200k in a year, you would w2 yourself for 30k and take a 170k dividend?

I am not sure my accountant would like this plan. Taking say that 90k or 100k might be plausible, but 30% of the average wage?

(And at the 90k point.. FICA goes away past 110k anyway, so the savings is fairly minimal)

I think what he means is that your pay must be within 30% of the average wage. So you could likely pay yourself between 63k and 113k if the average wage was 90k.

Actually, the $30k COULD be reasonable if you are at that point only being a marketer.

If you go on indeed or glassdoor, search what ever your main task is, and screen grab that average salary. Keep searching until you find one that works best for you.

Change your salary with each task by being an hourly w2 employee with different charge codes based on the task. Just make sure you track what work you are doing.

(IANAL/A)

I'd set up a solo-401k and take 20% of that ($40k) as a profit-sharing retirement plan between the "employer" and "employee". Add in a $18k elective contribution out of your W-2 wages as well. IIRC there's a maximum total contribution of $56k so this doesn't work particularly well past the $180k net profit point or so.

I'm seriously considering moonlighting as a freelancer just to get access to this kind of setup. Of course, my daytime employer not having a 401k makes a big difference - with the combination of the profit-sharing and employee elective contribution, the first $22.5k annually would go directly into a tax-deferred retirement account. Partner up with different people to run unrelated businesses, and you can set up a profit-sharing plan with each to get separate "20% up to $56k/yr" buckets.

Anyhow, I'm kind of rambling. My point is that when you wear both the "employer" and "employee" hat, there's some really good options that open up that most employers don't offer because it's a wealth-transfer from employer to employee.

More like $60k. But no, your accountant will not go for anything even remotely risky. Accountants are notoriously conservative. No accountant is going to stick their neck out for their average customer.

You have to pay the big bucks for the guys willing to push the envelope. And that's not be ause they are better, it's because they have to make more money to offset the risk to their career.

i went through calculating it. that works only for narrow range of revenue/profits per year. if you max out fica taxes, you are at loss, since s-corp still pays its half of employee taxes. on top of it whole uncertainty of "right" amount of salary and possible audits made me steer away from converting my llc into s-corp.

So while it might work for some - it is not a major "loophole" for top 0.1% (not even for top 1% i think)

It saves me accounting fees for the year ;). It comes out to just under $4k in savings for the year.

Not a major loophole, but its a nice little bonus.

> On the dividend, you don't end up paying toward FICA. Effectively saving you up to 15.3%.

The dividend is taxed at 15% for incomes over $37,950.

That is for a Qualified Dividend. S-Corp Dividends are "ordinary", and are taxed as regular wages minus FICA/Self Employment Tax.

Don't you lose some of the benefits associated with filing as self-employed? E.g., health insurance premium deduction, ability to defer a larger portion of the income into SEP-IRA?

In an S-Corp as a "2% Owner," you are still granted the insurance deduction, but only if no one is qualified for a health plan through their employer.

"A 2-percent shareholder-employee is eligible for an above-the-line deduction in arriving at Adjusted Gross Income (AGI) for amounts paid during the year for medical care premiums if the medical care coverage was established by the S corporation and the shareholder met the other self-employed medical insurance deduction requirements."

https://www.irs.gov/businesses/small-businesses-self-employe...

Corporations have to pay quarterly estimated taxes.

So do most contractors.

So do most very wealthy people. Rule of thumb (possibly law?): if you will owe more than $1000 at tax time, you have to file quarterly.

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