Thread: Determining salary.

Originally Posted by tubby

Yup I understand all of that but that's not the focus of what I'm trying to get at. For purposes of this discussion, taxes aren't on the radar.


Yes, like a paycheck. Call it whatever you want to call it, but the money you pay yourself for personal living expenses is what I'm talking here.


Neither have I, but when it comes time to draw a salary/paycheck, I'm lost as to how much to pay myself.


Yes I have a CPA. Now the bold part is what I'm talking about. OK so that total salary comes up to a dollar amount. Why THAT dollar amount? Was that figured :

1) as a fixed dollar amount you figured would be nice to get paid
2) as a fixed percentage of profit (5%, 10%, etc)
3) that's what you made at your last job before your business so that's your starting point

That's what I'm trying to figure out. I'm getting frustrated at not being able to articulate well enough to get the answer I'm seeking. I don't give a damn about taxes for salary purposes. I really don't and the thread is getting distracted by its discussion. I don't need some long ass answer about SET avoidance by deferring taxes to the corporation, blah, blah, blah, I get it. That doesn't answer how you figure to pay yourself $30K salary.

I used my cpa's advice and determined what would a reasonable salary for my work. We also determined what expenses I can charge to the company, like trips, meals etc.. The goal is to avoid an IRS audit or if audited make sure I am ok. IRS wants you to get the largest salary so they can collect taxes. Also, your CPA should advise you on how much salary would be reasonable.
If your company profits 1 mill and your salary is 24k and the rest is dividends, it probably won't fly with the IRS. They don't like owners getting paid dividends.
My question is, as a business owner, why don't you care about the taxes? You should want to pay the least amount of tax legally. The higher salary, means more fica, unemployment, social security taxes, ect.
Bottom line, I would go with what your CPA is recommending.

Originally Posted by khaiser

I used my cpa's advice and determined what would a reasonable salary for my work. We also determined what expenses I can charge to the company, like trips, meals etc.. The goal is to avoid an IRS audit or if audited make sure I am ok. IRS wants you to get the largest salary so they can collect taxes. Also, your CPA should advise you on how much salary would be reasonable.
If your company profits 1 mill and your salary is 24k and the rest is dividends, it probably won't fly with the IRS. They don't like owners getting paid dividends.
My question is, as a business owner, why don't you care about the taxes? You should want to pay the least amount of tax legally. The higher salary, means more fica, unemployment, social security taxes, ect.
Bottom line, I would go with what your CPA is recommending.

Exactly. My #2 goal in business is tax reduction, right behind #1 goal of generating income.

OP, if you are a sole proprietor, there is no such thing as a salary, so just transfer money from your business account to your personal account when needed to cover living expenses, tax liabilities, personal purchases, external investments, etc, etc. Trying to set a fixed monthly amount to transfer to your personal account really doesn't make any sense. Generally, outflows to your personal account will depend on your personal spending, and your personal spending will usually correlate with your business cash flow.... so in the end it's all interrelated.

I have had multiple "S" corps. I pay myself based on survey data. In other words, I have salary survey data that says a President of a $10M software company in the S.E. US with XX employees has a salary of $XXXK and a total compensation of $YYYK. I pay myself the salary and ignore the variable compensation; that comes from "S" distributions. If you don't have survey data, try google, there's lots of good data sources out there.

I will say that in my last gig I also employed my wife so that she could max out a 401K (company matched 50% up to 6%). In that case I took the survey data and paid myself half and her half so that we could both max out the 401K.

Good luck.

Originally Posted by khaiser

My question is, as a business owner, why don't you care about the taxes? You should want to pay the least amount of tax legally. The higher salary, means more fica, unemployment, social security taxes, ect.
Bottom line, I would go with what your CPA is recommending.

My company is an LLC with myself being the sole member (in my state, S corps cannot have just one owner). The amount of net profit my company makes at this point the 15.3% SET due is so low it's not even worth extra paperwork to avoid it. I'm using the default method of pass through taxation and the LLC files on our personal 1040 for tax purposes. I have no employees at this point as it's not to the point where I can afford one.

Originally Posted by Spencer

Exactly. My #2 goal in business is tax reduction, right behind #1 goal of generating income.

Yes, however the amount I have to pay due to SET is pathetically low I don't care.

OP, if you are a sole proprietor, there is no such thing as a salary, so just transfer money from your business account to your personal account when needed to cover living expenses, tax liabilities, personal purchases, external investments, etc, etc

.
Not a sole proprietorship, the company is an LLC and I'm the only member. People get confused and think its a sole proprietorship, but that can't be farther from the truth. The company is a legally separate entity than me personally.

Trying to set a fixed monthly amount to transfer to your personal account really doesn't make any sense. Generally, outflows to your personal account will depend on your personal spending, and your personal spending will usually correlate with your business cash flow.... so in the end it's all interrelated.

I have a full time job plus my business. I don't draw payment from the company yet.

Originally Posted by Tpup

If you don't have survey data, try google, there's lots of good data sources out there.

There are no data sources for my industry.

From a legal standpoint, you are correct, but from a tax standpoint, single member LLC's are disregarded and treated exactly the same as sole props by the IRS, and this is the POV you'd take when looking at salary/distributions/etc.

Originally Posted by Spencer

From a legal standpoint, you are correct, but from a tax standpoint, single member LLC's are disregarded and treated exactly the same as sole props by the IRS, and this is the POV you'd take when looking at salary/distributions/etc.

By default, yes, however I at any time can elect for the LLC to be taxed as a separate entity. At that time the LLC will have a return and I will have a return. Both will be separate tax entities.