Ask HN: Payroll Tax Hacks
16 comments
one large payment is not cheaper than periodic payments. You can use company money for non business expenses but the IRS may catch up to you at some point. The penalties are not that stiff, but I wouldnt do it. It would be better to put your effort into building your business.
Here is one (IANAL and you need one to do this - if you need one I can recommend one)
Form an LP, make your C corp a general partner in the LP, you will be officers in the C corp. You will be limited partners in the LP. This gives you liability protection. The LP becomes your operating entity. Money flows into the LP from clients. It turns out that LP's can distribute money to limited partners without paying social security tax. There is no minimum salary required to do this. Your actual employees can be employees of the C corp as usual.
You will save around 15K/year per person who does this.
If you want to get money out completely tax free, look up a SEP IRA. The SEP ira lets you contribute 25% of your income up to 49K tax free. But it must be available for all employees. The company can contribute up to 50%.
Meals are only 50% deductible and it probably isnt worth doing, but if you guys go to dinner and talk business then your should. But if you put your cars into an LLC you can have your C corp pay the LLC and then deduct all car related expenses (insurance, gas, maintenance, interest). You can do the same with medical related expenses. IANAL - get a lawyer who understands how to do this.
Here is one (IANAL and you need one to do this - if you need one I can recommend one)
Form an LP, make your C corp a general partner in the LP, you will be officers in the C corp. You will be limited partners in the LP. This gives you liability protection. The LP becomes your operating entity. Money flows into the LP from clients. It turns out that LP's can distribute money to limited partners without paying social security tax. There is no minimum salary required to do this. Your actual employees can be employees of the C corp as usual.
You will save around 15K/year per person who does this.
If you want to get money out completely tax free, look up a SEP IRA. The SEP ira lets you contribute 25% of your income up to 49K tax free. But it must be available for all employees. The company can contribute up to 50%.
Meals are only 50% deductible and it probably isnt worth doing, but if you guys go to dinner and talk business then your should. But if you put your cars into an LLC you can have your C corp pay the LLC and then deduct all car related expenses (insurance, gas, maintenance, interest). You can do the same with medical related expenses. IANAL - get a lawyer who understands how to do this.
There are structural advantages to keeping it a C corp (ie when raising money). LP and LLC have no real conception of shares in the same was as the C corp
Money in an IRA is still retirement money (not cash in hand) -- you have to pay tax if you want to get the money this year
Meals are 100% deductible if you are working -- read irs publication 15b on fringe benefits
For the cars, you can also opt for the 50 cent per mile deduction (useful in high mileage situations)
Money in an IRA is still retirement money (not cash in hand) -- you have to pay tax if you want to get the money this year
Meals are 100% deductible if you are working -- read irs publication 15b on fringe benefits
For the cars, you can also opt for the 50 cent per mile deduction (useful in high mileage situations)
Note: If it's a C corp you don't have to take salary (iirc only S corps have to declare at least one person taking salary) and you can keep money in the firm (LLCs and LPs aren't structured to do this well), so you don't need to take any money out that you don't need personally.
As a general rule, the less money you need to pay yourself, the better.
1) If you turned profit in the same year you made the investment, you can return almost the entire original investment to yourselves with no tax penalty, derisking your individual stakes
2) You can pay dividends which are taxed at a lower rate (you dont have to pay FICA)
3) You can institute a buyback (so that the company buys back outstanding shares at a higher valuation). This is a little sticky because you can't arbitrarily inflate the valuation (the technical term is "arms-length", meaning that it should be a fair value that disinterested parties could find acceptable). The transaction would be seen as capital gains, and you have the flexibility of controlling timing and amounts.
4) Almost everything you can think of is a business expense:
- Food (of course)
- Cars (oh god there are a ton of deductions related to business vehicles and vehicles used whilst commuting)
- Parties (You have to hold shareholder meetings at one point in time ...)
Though I imagine this is better discussed over email.
As a general rule, the less money you need to pay yourself, the better.
1) If you turned profit in the same year you made the investment, you can return almost the entire original investment to yourselves with no tax penalty, derisking your individual stakes
2) You can pay dividends which are taxed at a lower rate (you dont have to pay FICA)
3) You can institute a buyback (so that the company buys back outstanding shares at a higher valuation). This is a little sticky because you can't arbitrarily inflate the valuation (the technical term is "arms-length", meaning that it should be a fair value that disinterested parties could find acceptable). The transaction would be seen as capital gains, and you have the flexibility of controlling timing and amounts.
4) Almost everything you can think of is a business expense:
- Food (of course)
- Cars (oh god there are a ton of deductions related to business vehicles and vehicles used whilst commuting)
- Parties (You have to hold shareholder meetings at one point in time ...)
Though I imagine this is better discussed over email.
What if it's for a single person LLC? I'm interested in payroll hacks for that too.
Hire a payroll service. Find one that guarantees they will do all the filings, on time. You write one check and don't have to do the paperwork.
Quickbooks Online will handle this for ~$30/mo. They transfer the money directly out of your account and handle state/fed taxes, etc. Really easy.
I don't think that's what he's asking about though. I think he's asking if there's any legal strategies to make your money go further when you're both employer and employee.
I don't think that's what he's asking about though. I think he's asking if there's any legal strategies to make your money go further when you're both employer and employee.
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most companies this size pay the 3 individuals on 1099, ie independent consultants. no payroll tax on 1099 (at the company level)
Be careful, the IRS is on the lookout for misclassification of employees as independent contractors. It wouldn't be too hard to figure out either, since the majority of your income would be coming from a single "client" on your tax returns, and that amount would match the totals for the company. Make sure you read and understand the rules or you could end up liable for penalties and back taxes.
http://www.irs.gov/businesses/small/article/0,,id=99921,00.h...
http://www.irs.gov/businesses/small/article/0,,id=99921,00.h...
FYI: That rules out providing health insurance on a employee group plan.
this sounds useful. Thanks! I'll look into it.
IANAL or a finance guy so forgive me for not knowing the specifics of this, but can't you issue dividends that are taxed significantly lower than payroll which requires income tax? Or is this only capital gains?
ordinary dividends are taxed like income. the only difference is that you don't have to pay FICA (social security and medicare) on that money.
This year, self-employment social security is 4.2% + 6.2% = 10.4% up to wage base of 106800 and medicare is still 1.45% + 1.45% = 2.9% --> 13.3%
(the reason why there are two numbers for each part is that there is a portion the "employee" must pay and a portion the "employer" must pay. The Obama payroll holiday only extended to the employee portion.
This year, self-employment social security is 4.2% + 6.2% = 10.4% up to wage base of 106800 and medicare is still 1.45% + 1.45% = 2.9% --> 13.3%
(the reason why there are two numbers for each part is that there is a portion the "employee" must pay and a portion the "employer" must pay. The Obama payroll holiday only extended to the employee portion.
you dont pay SS tax but you pay two income taxes. Regular corporate income tax then personal income tax on any distributions.
for a C corp the income taxes are deductible up to a reasonable amount (so its not quite two full income taxes). At a small level, it may more sense to make salary payments rather than dividends (depends on the scale)
last i recall, pub 535 discussed this
last i recall, pub 535 discussed this
Does anyone have any payroll tax hacks? One (uneducated) thought I had was to not pay salary but use company money to pay for various expenses like dinner at the office. I read somewhere that doing one large payment of salary is cheaper than periodic payments.
Any ideas? Thanks.