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The guessing game with your personal payroll

Discussion in 'Business Operations' started by DFW Area Landscaper, Jul 1, 2006.

  1. DFW Area Landscaper

    DFW Area Landscaper LawnSite Silver Member
    from DFW, TX
    Posts: 2,116

    Pyaing yourself from your LLC or Corporation involves a lot more guesswork than I would have ever imagined.

    You certainly don't want to leave any earnings in the LLC or corporation as profits because then you will pay two sets of income taxes on those profits. The legal entity gets taxed this year as profit and then when you take it out as either salary or dividend next year, you pay income & wages taxes on that profit again.

    On the other hand, if you take too much in salary and dividends, you can screw yourself for section 179 benefits in the current year. Additionally, if you take more salary and regular depreciation takes the LLC/Corp into a loss situation, you have just paid more ss/med/income taxes than you should have.

    It is tricky.

    Anyone have any advice for doing this?

    DFW Area Landscaper
  2. i_plant_art

    i_plant_art LawnSite Senior Member
    Posts: 558

    llc doesnt have double taxation thats why the IRS formed it...... the earnings can be passed through to the owners as income either way.... an S sorp doesnt have double taxation either same thing as an llc pretty much only more legal protection and a different set of "rules" a C corp will have double taxation though and a completely different set of rules than either the s-corp or LLC.
  3. Lumberjack

    Lumberjack LawnSite Member
    Posts: 180

    The rules are exactly the same as for any other employee. Your best bet is to have a cpa set up your payroll for you so it gets done right. it may seem to be a pita but one of the easiest ways to break the corporate protection is to catch them playing fast and loose with the corp. money... the first and most important rule you need to remember is... its no longer your money!

    If you really hate the paperwork or just want to save yourself the headaches then just get a bookkeeper to handle payroll. let someone else eat aspirin while you just cut an extra lawn to pay for it... :)
  4. DFW Area Landscaper

    DFW Area Landscaper LawnSite Silver Member
    from DFW, TX
    Posts: 2,116

    In our case, we are an LLC but we filed some paperwork with IRS in the beginning such that we are taxed as an S-Corp.

    The stuff is very confusing. I understand the separate entity of the LLC/S-Corp. The whole "everything passes through to the owners" is where I get lost.

    DFW Area Landscaper
  5. Lumberjack

    Lumberjack LawnSite Member
    Posts: 180

    well in a normal "c" corporation the company has an income which is taxed. The company can hold unlimited amounts of investments and inventories and is considered a legal entity that can do anything a real person can do without any limitations.

    So under a c corporation the company earns money and after the profits are tallied it pays income tax on the profits. After all that it can choose to issue a dividend to its stock holders or simply retain the profits for growth capital and so on.

    A s corporation does not pay income tax on the profits but instead all profits and losses are automatically divided among the stock holders and directly attached to thier personal incomes whether or not the money is actually distributed. There are a few limits to the size of the company as well.

    With a corporation you should pay yourself a regular wage as it is considered a business exspense and is deducted before taxes. Under ideal conditions you want to pay yourself enuff to show a very small company profit and in some cases a company loss but keep it within the industry norms so you dont raise a flag at IRS headquarters.

    Beyond pay there is a whole basket of perks you can arrange so long as you understand the IRS rules that govern them. Take your work truck (so long as you own a personal vehicle) you can have the company own the truck and pay all its gas and insurance. Not only that but If the vehicle is stored at your property you can rent the space out to the company so long as it is used by the company only! Theres a ton of ways to work all this but Do use a CPA to keep out of trouble with IRS.
  6. topsites

    topsites LawnSite Fanatic
    Posts: 21,653

    I am a member-based LLC set up also as a type of corporation, the IRS did this for me as well.

    Like you say, the more your co. earns, the more profit you pay % tax on.
    And if you pay yourself more, you're had again.

    The first thing to do is educate yourself on the gross/year per business tax limits. For example, there exists a limit somewhere around 34k > Earn less than 34k and the IRS doesn't even tax you as a small business - You must earn OVER 34k / year to be even considered a small business, from there I think the next limit is 100k or so but again, inform yourself as staying below these limits can help a LOT. Not only that but if you think you're going over one such limit, you will need to go over by more than a few thousand just to help defray the cost of the tax increase, so again, plan accordingly.

    So what I decided is since I couldn't leave it in the bank and I couldn't pay it to myself, the least I could do is make life at work as nice as possible. So what I do is spend most of my money on equipment and parts and just spend it, fuel, newer truck, you name it, get rid of it and don't be a fool but spend it smart.

    ALL of this then comes out in expenses at the end of the year, the idea is to show as little profit as you can.

    There is one drawback but it is minor:
    At least in my county, I have to pay property tax on ALL business and business-related equipment (yes, even oil and filters, everything). However, the % is low and it is pro-rated, the worst is the first year when stuff is brand-new but after that it is not so bad... And even at its worst, it might cost me 200-300, maybe 400 dollars in property taxes and I am done.

    Also, you realize that come December, a few checks can wait until January to be deposited so they go into next year's gross... Now this won't make night into day, but it can help keep your gross at 33,500 if all you have is another 1,000.00 to put in the bank, that can wait until next year.

    Hope that helps.
  7. topsites

    topsites LawnSite Fanatic
    Posts: 21,653

    Be wary of the option to 'defray' cost of new equipment beyond normal pro-rate of wear and tear.

    The IRS gives you this option, as a small business you can deduct MORE than what the IRS allows but to me this is a bad idea because sure enough, years later (when you either sell or scrap it), the extra deduction you took needs to be paid back (pos is what this is).
    So, take the standard % deduction that the IRS auto-prorates, whatever it is.

    A new mower might cost 7k.
    The IRS automatically allows you to deduct 10% / year (no I am not sure but bear with me) so you can deduct $700 as wear and tear.
    However, you could deduct more, you can deduct as much as you want, yes ALL the way to the entire value of the equipment (so 700 - 7k, anything in there).
    But if you deduct say 2k, then next year what? 700 + 630 (10% / year) = 1330, so now you're 670 behind the actual value of the machine (as determined by the IRS), but you keep playing this game and by the time you sell it, you done deducted the whole 7k but the IRS still values your machine at 2k <- You're had for the tax on this 2k, you got to pay this AND whatever you sold it for, lol oh man.
  8. DFW Area Landscaper

    DFW Area Landscaper LawnSite Silver Member
    from DFW, TX
    Posts: 2,116

    We will be using Section 179 on all of our CapEx this year. The rest will be base salary and dividends. Should save us about $8,000 to $10,000 in income taxes, depending upon the bracket we are in.

    No way in hell do I want to save some depreciation for future years. I will send the savings I realize from Section 179 to Ameritrade and put it to work immediately.

    Thanks for the explanation LumberJack. I think I understand how the S-Corp works now with the flow through. Whatever is left in the S-Corp at the end of the year just turns into personal income via sechedule S.

    DFW Area Landscaper

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