Corporations and Self Employment Tax - Posted by Bob Watkins


#1

Posted by George (NoVa) on December 30, 1998 at 10:52:30:

The IRS handles the taxation of S & C corps differently! But your example supports my point about keeping the corporate veil intact! If you don’t follow ALL the rules, you become personally vulnerable. A good accountant and lawyer are an absolute necessity in these situations.

Spend a few bucks and get Bill Bronchick’s course! I think it’s even on sale right now, or at least has a price increase coming. It’s worth every penny!


#2

Corporations and Self Employment Tax - Posted by Bob Watkins

Posted by Bob Watkins on December 29, 1998 at 10:39:42:

I think this question was answered a long time ago on this board, but I can’t seem to recall the answer.

Does an officer of a C-corp. have to pay self employment tax on his or her salary? I know it is necessary for any employees, but what if the corp only has officers?

Thanks and Happy New Year!


#3

No… - Posted by JPiper

Posted by JPiper on December 30, 1998 at 12:53:07:

Hi Bob:

If I had gotten the below answers I would be confused…so here’s one more.

The answer to your question is “no”…if you are the officer of a C corp you DO NOT pay self-employment tax. As an officer of a C corp you are an employee. As an employee you DO NOT pay self-employment tax.

What you do pay is the normal taxes that all employees pay…social security tax, withholding taxes, etc. In addition, your corporation will pay an amount equal to your social security tax for you. The total of the amount you paid personally plus the amount that the corporation paid for you, will approximately equal the self-employment tax. (I say approximately because in the back of my mind self-employment tax is somewhat higher than the combination of employee/employer tax, but I could be wrong on this…memory fades about these things).

Maybe I’m just being picky…but George has given a good answer below, but the title should be “no”, not “yes and no”. Bronchick gives a good answer as well, but the title “yes, always” is completely wrong for the question posed. Self employment tax is never paid by an employee. JHyre give the answer “yes” with no explanation, but again, corporate employees DO NOT pay self-employment tax. They do pay a similar tax called social security tax, with the employer making an equal contribution.

Finally, I would comment on the “dividend” payment idea versus the payment of salary. Payment of a dividend will avoid the social security tax, since it is not earned income. However, a dividend payment is NOT a tax deductible item at the corporate level. Therefore, dividends are paid in “after-tax” dollars. Guess what?? The corporate tax in a C-corp equals or exceeds the combination social security taxes that would be paid by the employee/employer on earned income (salary or bonus). Either way, dividends or salary/bonus will be taxed at the personal level when received. Therefore one has to wonder about the wisdom of paying dividends as an alternative to salary/bonus. There are better methods of paying yourself money…some of which are covered by Bronchick in his course, others that you may receive from your CPA.

JPiper


#4

Re: Corporations and Self Employment Tax - Posted by Yes - ALWAYS!

Posted by Yes - ALWAYS! on December 30, 1998 at 10:15:31:

An officer by definition is a “statutory” employee and must pay SS, Medicare & withholding tax on all “salary.” Of course, an officer/shareholder of a c-corp can take non-taxable loans and fringe benefits. I outline dozens of ways to do this in my “Bulletproof Corporation” course.


#5

Yes & No - Posted by George (NoVa)

Posted by George (NoVa) on December 29, 1998 at 14:02:36:

Bob,

You really need to discuss this with your tax accountant. But here are some things that may help.

The C-corp is a separate taxable entity than you. You are an employee of the corporation (even as an officer). And your taxing situation should be handled as such. You must pay your FICA and the Corp pays their share of FICA. There are no self employment taxes for employees (although the total amount paid will total up to the same as the two FICA’s)

The way to avoid the FICA’s would be to pay yourself a low (too low will arouse IRS suspicion) salary and take your profits as dividends. This will avoid some of the tax.

The corporation is only valuable to you if you maintain the corporate status. You need protect yourself against having the corporate veil pierced. If you handle the taxation as self employment, no court will uphold the validity of the corporation. I would suggest that this is a bigger question for you than the taxation issue. You may want to check out Bronchick’s course on Bulletproofing your Corp.


#6

Re: No… - Posted by JHyre in Ohio

Posted by JHyre in Ohio on December 30, 1998 at 18:01:14:

J. Piper is correct. I jumped the gun & answered the question for “employment taxes” instead of “self-employment taxes”. As Mr. Piper points out, the result is identical, but my reply was sloppy- nice catch, J. Piper.

John Hyre


#7

Re: No… - Posted by Bob Watkins

Posted by Bob Watkins on December 30, 1998 at 16:17:23:

JPiper -
Thank you for taking the time to give such a thorough answer. You actually answered a question I did not ask, but which was at the heart of why I was asking: I was wondering if the SS and other taxes would be more or less then the self employment tax.
One further question:
The IRS frowns upon leaving “too much” cash in a corp as retained earnings (I guess because they don’t like owners to defer taxes on salary or dividends for too long), but how much is too much? Any ideas?
I am debating setting up a Corp to handle flips and don’t really need additional income to live on for day to day stuff. Ideally I would like to leave as much cash and equity in the corp as possible to fund additional investments (hopefullly enough to quit my current corporate job in about 8 years).

I guess the main question is:
How badly will the IRS frown upon a corp that doesn’t pay out salary or dividends? Or very little?


#8

Re: Yes & No - Posted by The Baze

Posted by The Baze on December 29, 1998 at 17:34:24:

Let me preface this by saying I know this applies to S corps. I’m not 100% sure about C-corps, but I believe it does.

One thing to remember is that if you take your profits in the form of distributions, or dividends, the IRS treats the first $7,000 as salary, so there will be the normal FICA expenses. Also, the IRS has what they call reasonable. If you’re an attorney and pay yourself $7,000 in salary, but take $100,000 in dividends, you’re probably going to get burned if you’re audited. My firm has a client now that did just that, and the IRS told him that $70,000 was to be considered salary. Now he owes payroll taxes on those earnings. Guess what, he also owes penalties and interest because he didn’t pay when the “salary” was paid. Keep it in mind.


#9

Re: No… - Posted by JPiper

Posted by JPiper on December 31, 1998 at 11:15:40:

What my CPA tells me is that there is no corporation without an employee. There is no employee without a salary. Therefore he makes me pay a salary to myself.

I would not flip without using a corporation for this purpose. First, there is the liability issue. Second, IF you are classified as a dealer then it’s better to have this dealer activity in a corporation…because if the dealer activity is personal you will be forced to pay self-employment tax on the earnings.

So you pay yourself a small salary. The rest of the money you retain in the corporation. It may be paid out for expenses, retirement plans, health insurance, etc. Then you may invest it in other ways.

Just remember that one of the disadvantages to a C corp is that of double taxation. Here’s how double taxation arises. You retain your earnings in the corporation, thereby paying the corporate tax. Now you pay the money out the subsequent year in the form of either salary or dividends, and it will be taxed again at the personal level. Hence double taxation.

Giving thought to how you will handle your profits from the corporation is an important subject, one that should be discussed in detail with your advisors.

But as far as whether you should incorporate to flip…this to me would be a no-brainer. Do it.

JPiper


#10

Accumulated Earnings Tax - Posted by JHyre in Ohio

Posted by JHyre in Ohio on December 31, 1998 at 05:43:10:

Another very sticky, subjective area, which means tell EVERY detail to a tax professional. In a nutshell, the AET applies to amounts retained by the corporation over $150,000. For amounts retained above that limit, you must show a reasonable business need for retaining the money and a plan for its use. Reinvestment is a reasonable business need.

John Hyre