Ask HN: Do we need to have payroll in C-Corp ?
We are a small C-Corp with three shareholders, two of whom are non-residents. The question is: do we need to have (or obligated to have) a payroll to pay salary to our CEO who is also a shareholder and is resident, or can we avoid it and just pay out dividends ? The issue is that keeping payroll brings much hassle into tax filing procedures. Any suggessions on how to avoid payrolls ?
6 comments
I agree with most of the advice given so far, but be careful that you do not interpret it too liberally. You can't get around payroll by just calling your workers contractors and sending them a 1099. The IRS has pretty stringent rules about who is a contractor and who isn't. Furthermore, you can't get around paying payroll taxes by not taking a salary yourself. The IRS presumes no one would work for free so expects everyone working for the company is getting compensated somehow. If you are a valid contractor, it is fine to get paid as such. But if you are working full time long term for the company I can't imagine there is an accountant or lawyer who will tell you it is ok to call yourself a contractor and skip doing payroll.
I've done both: distributions/dividends and payroll. For years I calculated payroll on my own. I highly recommend spending the $60/month to use ADP's payroll service. It pays for itself -- even with a tiny company -- in saved time and automatic form W-2, form 941, form 940, and state unemployment reporting. Unlike other services I've looked into, ADP also indemnifies you against any mistakes made with the IRS, which is a HUGE selling point. If you've ever received an IRS penalty notice for a late report, you know what I mean!
As a side note: It is disappointing that our government's laws are so burdensome that private companies exist just to help citizens comply with the laws.
As a side note: It is disappointing that our government's laws are so burdensome that private companies exist just to help citizens comply with the laws.
Regulation can generally be either simple or fair.
No, you don't. I have a C Corp and and no FTEs - just contractors - including myself. We're incorporated in California. I set up the company with legal counsel, at considerable (though thankfully deferred :)) expense. Both my lawyer and banker agree I don't have to have any employees.
I don't know about paying dividends - doesn't capital gains get taxed quite heavily? I think the normal route is to pay everyone as a contractor and let them sort out their own taxes.
You'll just need to send 1099s to all your contractors - and if you use special electronic payments through a bank like Wells Fargo, that'll take a lot of hassle out of it all.
I don't know about paying dividends - doesn't capital gains get taxed quite heavily? I think the normal route is to pay everyone as a contractor and let them sort out their own taxes.
You'll just need to send 1099s to all your contractors - and if you use special electronic payments through a bank like Wells Fargo, that'll take a lot of hassle out of it all.
Dividends are taxed at 15% through 2010 which is usually lower than your tax rate, though not always. This, of course, assumes that the dividen tax rate isn't isn't raised by the new administration. And yes, the dividends that you are receiving have already been recognized by the corporation as profit and taxed at its tax rate. Your dividends are taxed twice.
Payroll doesn't have to be complicated - through our bank (Bank of America) we have an automated payroll system that handles everything, including all the tax forms and it is free (since we meet some threshold of employees w/ direct deposit at BofA).
No. I own a C-Corp with three equal shareholders.
In Texas, you need to decide on the frequency of dividend distribution. We distribute on the 1st of every month. That's all you need.
You also need to have documented shareholder meetings and so forth, but I'm digressing.
In Texas, you need to decide on the frequency of dividend distribution. We distribute on the 1st of every month. That's all you need.
You also need to have documented shareholder meetings and so forth, but I'm digressing.
I remember reading about a required minimum salary for officers, so...
Where are the tax accountants?
Where are the tax accountants?
You're thinking of the pass-through tax situation for S-Corps; people play games with dividends vs. salary to hide their money from FICA taxes. If you're a 1040 contractor, you're paying FICA anyways.