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205mx
01-23-2013, 09:58 PM
This is a question for those of you who operate your business as the president of the S-corp. ( eg; mow man, inc...)

The tax code states that you pay yourself a reasonable wage for the industry.
this is vague at best. Can you pay yourself based on commission? or maybe salary plus commission? then bonus dividends at the end of the month or year?

Someone with some experience, please elaborate.

Thank you.

britsteroni
01-23-2013, 11:03 PM
You are correct that "reasonable salary" is the requirement. What that means is up for debate. The general idea is what would it cost you to hire someone to do your daily job? I think in this industry you could afford to be a little more aggressive. But this is something you should work out with your accountant. But know this, it is you the IRS will come after and try to re-characterize distributions to wages in order to capture the 15.3% SS taxes (not the accountant).

As far as your other questions, I don't know of many business owners who pay themselves based on commission. After all, you wear many more hats than salesman. Whatever you decide on as reasonable, you can take dividends whenever you would like. Most business owners in this industry wait towards the end of the year to see how much cash they have left due to the seasonality of landscaping and lawn care.

Just my 2 cents...

Stillwater
01-23-2013, 11:29 PM
http://www.lawmg.net/2012/07/05/determining-reasonable-compensation-in-an-s-corporation/
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snomaha
01-23-2013, 11:59 PM
This is a question for those of you who operate your business as the president of the S-corp. ( eg; mow man, inc...)

The tax code states that you pay yourself a reasonable wage for the industry.
this is vague at best. Can you pay yourself based on commission? or maybe salary plus commission? then bonus dividends at the end of the month or year?

Someone with some experience, please elaborate.

Thank you.

My experience has been to take a fair market salary I can live on - take tax distributions quarterly and keep profits in the company to fund growth.

Efficiency
01-24-2013, 08:27 AM
My experience has been to take a fair market salary I can live on - take tax distributions quarterly and keep profits in the company to fund growth.
Exactly. salary is literraly equal to my best guys
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205mx
01-24-2013, 10:17 AM
So any retained earnings will not be taxed until you bring them home?

Going to talk with my accountant tonight.
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snomaha
01-24-2013, 11:11 AM
So any retained earnings will not be taxed until you bring them home?

Going to talk with my accountant tonight.
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I'm not an accountant but do have an s-corp. All profit funnels to the shareholders of the S corp at the end of the year and is taxed at your personal income tax rate.

Efficiency
01-24-2013, 11:34 AM
So any retained earnings will not be taxed until you bring them home?

Going to talk with my accountant tonight.
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No, taxed but the s and c corp allow you more games to defer, etc
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branchoutshrub
01-24-2013, 11:35 AM
Great comments and information on S-Corps.

With our situation, my account advises us on how to get the most out of what we do.

britsteroni
01-24-2013, 02:40 PM
Don't confuse S-Corps and C-Corps. For most in this industry, a C-Corp would be a terrible move. There are some advantages, but they are few if you are a small business owner.

Having said that, let's go over an example to make sure we're all clear:

205MX Lawncare 2012 Profit and Loss:

Filing as a Sole-Prop on Sch C:

Total Sales: $80,000
Total Expenses: 40,000
Profit: $40,000

Taxes involved:
Self Employment Tax: $6,120
Federal Income Tax(assume actual tax rate of 15%): $6,000
State Income Tax (assume 5%): $2,000
Total Taxes Paid = $14,120

Now if filing 1120S:

Total Sales: $80,000
Total Expenses: $40,000
Owner's Salary: $30,000
Payroll Tax Expense: $2,295 (7.65% if the owner's salary)
1120S Profit: $7,705 ---> This profit flows to your 1040 and is reported to you on a K-1.

So, now it is time to file your personal 1040:

Salary $30,000
Profit from K-1 from S-Corp Return: $7,705

SS & Medicare Taxes on Salary = $2,295
Federal Income Taxes (on salary and K-1 profit) = $5,656
State Income Taxes = $1,885
Total Taxes Paid = $12,131 (Remember, even though the S-corp paid one half of the SS taxes for the owner's salary, it still comes out of the owners pocket.

So, by filing the S-Corp instead of Sole-Prop, you save $1,989. Much of that savings is going to be eaten up by accountant's fees. Plus the additional time it will take you as the business owner for record keeping and other filings.

This above example isn't to the penny and there are a few things I left out, but it gives a good overview of how the tax calculation works out.

Note that the $7,705 from profit from the S-Corp is taxed at the same federal and state rates as the sole-prop. The only difference is the payroll tax savings.

Hope this was helpful.

JFGLN
01-24-2013, 05:33 PM
Don't confuse S-Corps and C-Corps. For most in this industry, a C-Corp would be a terrible move. There are some advantages, but they are few if you are a small business owner.

Having said that, let's go over an example to make sure we're all clear:

205MX Lawncare 2012 Profit and Loss:

Filing as a Sole-Prop on Sch C:

Total Sales: $80,000
Total Expenses: 40,000
Profit: $40,000

Taxes involved:
Self Employment Tax: $6,120
Federal Income Tax(assume actual tax rate of 15%): $6,000
State Income Tax (assume 5%): $2,000
Total Taxes Paid = $14,120

Now if filing 1120S:

Total Sales: $80,000
Total Expenses: $40,000
Owner's Salary: $30,000
Payroll Tax Expense: $2,295 (7.65% if the owner's salary)
1120S Profit: $7,705 ---> This profit flows to your 1040 and is reported to you on a K-1.

So, now it is time to file your personal 1040:

Salary $30,000
Profit from K-1 from S-Corp Return: $7,705

SS & Medicare Taxes on Salary = $2,295
Federal Income Taxes (on salary and K-1 profit) = $5,656
State Income Taxes = $1,885
Total Taxes Paid = $12,131 (Remember, even though the S-corp paid one half of the SS taxes for the owner's salary, it still comes out of the owners pocket.

So, by filing the S-Corp instead of Sole-Prop, you save $1,989. Much of that savings is going to be eaten up by accountant's fees. Plus the additional time it will take you as the business owner for record keeping and other filings.

This above example isn't to the penny and there are a few things I left out, but it gives a good overview of how the tax calculation works out.

Note that the $7,705 from profit from the S-Corp is taxed at the same federal and state rates as the sole-prop. The only difference is the payroll tax savings.

Hope this was helpful.

Some other things to think about,

Trucks and equip are owned by the corp. Auto insurance cost more.
I get a paycheck every 2 weeks like the other employees.(assuming sufficient funds)
I lease my shop to the corporation which makes me a landlord with rental income and possible write offs.
Corp has its own credit rating.
Cost more to have taxes prepared.