I am thinking of starting my own company. I would be 100% the owner.
So let me get this straight: If I draw a salary, I would have to pay a huge chuck of payroll tax on that PLUS federal income tax, etc. But if I don’t draw a salary on that and just pay myself a dividend, then I
*Would owe no payroll tax on that.
*Would owe less federal income tax on that–PLUS if the GOP makes dividends totally tax free, then essentially I would be totally tax free.
*BUT the company would still owe corporate tax on the operating profit, so I might actually come out worse in the end, right? (If the tax rate on the salary were lower than corporate tax, which comes out to be 40+%, correct?)
*Also, I would not be earning Social Security credits if I just got dividend income, right?
I know I will need to see an accountant to get the details down, but please tell me if there are any major legal/financial problems with the above. Thanks!
Sorry, no specifics, but it depends on how you set up your corporation. Would it be a separate entity from yourself? Or would you simply operate as a sole proprietorship? The tax codes are different for different types of corporations–for example, with the S-corp, there’s only one level of taxation (‘pass-through’), while other types of corps are taxed once at the corporate level and again at the personal income level.
The advice our CPAs gave me during the years I had a couple of S corporations going was to try and make about half of what I took out of the corporations distributions, or dividends, and to take the other half as salary on which I paid payroll taxes.
Ask a CPA.
I’ve run S-corps for years, but I’m not a CPA.
At the end of the day, assuming you’re not breaking the law and just hoping not to get caught, you’ll pay about the same taxes however you set it up. There used to be some pretty wide loopholes back in the 1960s, but most have been closed up.
If you perform work at your company, you MUST take a “reasonable” salary. Just taking dividends to avoid SS taxes is illegal and it’s a standard thing the IRS checks for. We got audited once and paid a hefty penalty & interest charge for doing exactly that.
What’s “reasonable”? Whatever you’d have to pay on the market to hire somebody to do your job.
So I don’'t agree with Ringo’s half-and-half rule. Depending on your business, you may have to pay yourself 90% of the profit as salary at first when the business isn’t making much money, but can eventually cut back to only maybe 20% once you’ve got a real strong money-maker on your hands.
A lot depends on how you set up your business. There are just so many business models to choose from these days. Whether you decide to be a sole proprietorship, a corporation, an S-corporation, professional corporation or a limited liability company depends a lot on the type of business you are engaging in. Some models are unavailable for certain types of businesses.
Write up your business plan - what exactly you want your company to do - and talk to a business attorney.