Comment by curveship | Hacker News Reader

Comment by curveship | Hacker News Reader

Parent Full thread

The IRS requires that you pay yourself a defensible fair market salary. If you're paying yourself only $15k, you will quite likely get audited, and unless you can defend the idea that your work is truly minimum-wage level work, you will owe quite a lot in fines. If this is advice from your accountant, I think you need a second opinion.

Edit to add citation. Also, I'm assuming you're talking about an S-Corp, since it would make not sense for a C-Corp. From http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employ... :

"If most of the gross receipts and profits are associated with the shareholder's personal services [i.e. not from other employees or capital], then most of the profit distribution should be allocated as compensation."

If you're only paying yourself $15k of the %80k your company brings in, and that $80k comes from payment by clients for work that you personally did, then you are definitely on the wrong side of the tax code.

Your tax advice is that if an S-Corporation brought in $80k and incurred $65k of legitimate, legal expenses, that the proprietor should run something more than $15k through payroll because of the "going rate" for developers or for some other reason?

I can't help but notice that your quoted text says "most of the PROFIT distribution" rather than "most of the GROSS INCOME distribution" The company can't pay out more than it brought in.

Obviously if you don't have $65k in expenses then you can't claim them. But, working as a contractor can have a lot of expenses - travel, office rent, utilities, etc. Giant corporations claim these expenses, a single-person company is entitled to the same deductions.

In 15 years of business I have been audited twice by the IRS with very minor amounts due (< $500) and nothing to do with deductions or expenses. The reason I bring it up is simply to illustrate that I'm not just lucky or flying under the radar. One time it was my mistake of a missing payment in my records and I simply paid the amount due. The other time was the IRS's mistake and I successfully contested it. If I had anything to hide I sure as hell would not be contesting an IRS audit for some small amount of money. My point is that I am in no way hiding or trying to sneak around tax codes. I do not encourage anybody to do anything illegal. I only encourage anyone to claim the maximum amount of legitimate deductions that they're entitled to claim. I also highly recommend having an accountant handle it for you who knows the tax laws and ensures that you are operating within them.

Reply on news.ycombinator.com