• FreeAdvice has a new Terms of Service and Privacy Policy, effective May 25, 2018.
    By continuing to use this site, you are consenting to our Terms of Service and use of cookies.

Avoid paying reasonable salary as the only owner/employee of a corporation

Accident - Bankruptcy - Criminal Law / DUI - Business - Consumer - Employment - Family - Immigration - Real Estate - Tax - Traffic - Wills   Please click a topic or scroll down for more.

emtiaz

Junior Member
What is the name of your state (only U.S. law)? California

Hi,

I am starting a business with a few thousand dollars at my expense only. I can't really afford to pay myself a salary let alone a reasonable one. How can I avoid paying myself a salary or may be paying a few hundred dollars in the beginning until I start getting business?

My CPA said to at least pay a $1000 per month to avoid any issues with IRS.

Also, is there a way to legally transfer the salary I take back into my company bank account?


Thanks,
emtiaz
 


tranquility

Senior Member
What is the name of your state (only U.S. law)? California

Hi,

I am starting a business with a few thousand dollars at my expense only. I can't really afford to pay myself a salary let alone a reasonable one. How can I avoid paying myself a salary or may be paying a few hundred dollars in the beginning until I start getting business?

My CPA said to at least pay a $1000 per month to avoid any issues with IRS.

Also, is there a way to legally transfer the salary I take back into my company bank account?


Thanks,
emtiaz
Why are you forming an S-corporation (I assume. I would think a C-corp would be worse.) rather than an LLC here?

Also, the general remedy the IRS uses when an owner is not paid a "reasonable" salary is to reallocate distributions, dividends or other payments to the owner (Even loan repayments.) as compensation rather than as originally booked. If you aren't getting anything from the corporation, there is not going to be any reallocation.

By asking if there is a way to legally transfer the salary you take back into the company, along with the prior question, makes me think you are not really communicating with your CPA adequately. Find one, or another or do something to increase your use of his expertise. You are going to need it. It is trivial to contribute more to your corporation or to make a loan to your corporation. (aka legally transfer the salary back) Depending on the facts, there may be rules on how that must be treated.
 

emtiaz

Junior Member
Thanks for your reply. The main reason to form a corporation was taxation. Everyone I consulted including my CPA told me that LLC will be taxed more and S-Corp is the way to go. But since I haven't gotten my green card yet, I cannot form an S-Corp. That is why I opted for a C-Corp hoping that I'll get my gc within 75 days so that I can convert it to S-Corp.

What would be ideal for me would be to pay nothing or as minimal as I can right now and increase the salary I take when the business picks up. Can you please point me to some web references where I can read about it?

This is my first business and I am not too clear about a lot of things and learning as I take on new challenges. Your help and advice is much appreciated.


Thanks,
Imtiaz
 

FlyingRon

Senior Member
Hold the phone. What is your immigration status? You can't use a corporation to dodge the work restrictions.

You can't elect S corporation status with non-resident alien shareholders that is correct, but a C corporation has it's own problems as well.

An employee of a C corporation (be it an officer or shareholder or not) has to comply with all the laws for both immigration work status and minimum wage and various payroll taxes.

The shareholder of an S corporation can fly by as long as their disbursements are all reflected as market pay (i.e., you're not allowed to avoid SS tax by claiming everything is a dividend). If you had hundreds of thousands of dollars in income, you would need to determine how much you had to take as salary and how much you could treat as dividend. In this case, you'd just consider it all salary.
 

tranquility

Senior Member
Thanks for your reply. The main reason to form a corporation was taxation. Everyone I consulted including my CPA told me that LLC will be taxed more and S-Corp is the way to go. But since I haven't gotten my green card yet, I cannot form an S-Corp. That is why I opted for a C-Corp hoping that I'll get my gc within 75 days so that I can convert it to S-Corp.

What would be ideal for me would be to pay nothing or as minimal as I can right now and increase the salary I take when the business picks up. Can you please point me to some web references where I can read about it?

This is my first business and I am not too clear about a lot of things and learning as I take on new challenges. Your help and advice is much appreciated.


Thanks,
Imtiaz
http://www.thetaxadviser.com/issues/2011/aug/nitti-aug2011.html

If you really want to know something about it, read the cases and letters the footnotes point to as well.
 

emtiaz

Junior Member
Hold the phone. What is your immigration status? You can't use a corporation to dodge the work restrictions.

You can't elect S corporation status with non-resident alien shareholders that is correct, but a C corporation has it's own problems as well.

An employee of a C corporation (be it an officer or shareholder or not) has to comply with all the laws for both immigration work status and minimum wage and various payroll taxes.

The shareholder of an S corporation can fly by as long as their disbursements are all reflected as market pay (i.e., you're not allowed to avoid SS tax by claiming everything is a dividend). If you had hundreds of thousands of dollars in income, you would need to determine how much you had to take as salary and how much you could treat as dividend. In this case, you'd just consider it all salary.
I am not trying to dodge any restrictions. I have EAD which entitles me to do a C-Corp or LLC without any restrictions. I have no problem in paying any taxes I owe as well. The thing that I am stuck at right now is that I don't have enough money right now to fund the business for more than 2 months. But I can fund it on a monthly basis as I have a permanent Job. I am just trying to figure out if I can do that cleanly or not.

In ideal situation, if its OK to take no salary for lets say 6 months that would be superb. Does IRS look at how many months you are giving out salary or the total income at the end of the tax year? If its latter, I am good as I can skip on salary for initial six months and then start drawing out reasonable salary when the business starts earning. Does that help in making my situation clear?


Thanks,
Emtiaz
 
Last edited:

STEPHAN

Senior Member
The EAD will not allow you to get a salary from your c-corp.

Talk to your immigration lawyer.
 

FlyingRon

Senior Member
The EAD will not allow you to get a salary from your c-corp.

Talk to your immigration lawyer.
Actually, it may or may not allow for it. Some are tied to a specific employer or situation, some aren't. Still best to check with the attorney.

Again the information I stated (and Tranquility's link to a very nice article) only apply to S corps. However, there's no way to dodge the labor requirements with a C corp. Your work for them, you are an employee even if you are the 100% shareholder. You must be paid and you must pay the requisist taxes. If your corporation can't do that, they are not solvent enough to operate.

However, you should talk to an attorney (or at least a CPA or other tax advisor). What you can do is defer you receiving the salary until a future date. Of course, you still have to collect and remit the various taxes. That's still pretty onerous and I suspect your proposed company is still not well enough capitalized to do that. In fact, even in the case of an S corp (if it were legal for you), I have my doubts about your capitalization.
 

emtiaz

Junior Member
Actually, it may or may not allow for it. Some are tied to a specific employer or situation, some aren't. Still best to check with the attorney.

Again the information I stated (and Tranquility's link to a very nice article) only apply to S corps. However, there's no way to dodge the labor requirements with a C corp. Your work for them, you are an employee even if you are the 100% shareholder. You must be paid and you must pay the requisist taxes. If your corporation can't do that, they are not solvent enough to operate.

However, you should talk to an attorney (or at least a CPA or other tax advisor). What you can do is defer you receiving the salary until a future date. Of course, you still have to collect and remit the various taxes. That's still pretty onerous and I suspect your proposed company is still not well enough capitalized to do that. In fact, even in the case of an S corp (if it were legal for you), I have my doubts about your capitalization.

Actually the business is in my wife's name and she's not working right now so there won't be any labor issue. But I am beginning to understand the situation a little. Thanks to you guys, I can have a meaningful discussion with my CPA about my options.

You guys rock!


Thanks,
Imtiaz
 

davew128

Senior Member
Again the information I stated (and Tranquility's link to a very nice article) only apply to S corps. However, there's no way to dodge the labor requirements with a C corp. Your work for them, you are an employee even if you are the 100% shareholder. You must be paid and you must pay the requisist taxes. If your corporation can't do that, they are not solvent enough to operate.
There is a lot more flexibility in a C corp employee shareholder to not take a salary if only because the main reason to TAKE a salary in a C corp is to reduce corporate taxable income, as opposed to avoiding payroll taxes in an S corporation. Also one can reasonably (and there is case law to support it) compensate such officers with only fringe benefits which are tax free in a C corp but are considered taxable compensation in an S corp.

Left unstated here is the that an LLC defaulting to a partnership avoids the issue altogether.
 

Find the Right Lawyer for Your Legal Issue!

Fast, Free, and Confidential
data-ad-format="auto">
Top