Small Business Forum
 
Home


Go Back   Small Business Forum > SMALL BUSINESS ADVICE > 03 - Accounting & Taxes
Register FAQ Members List Calendar Search Today's Posts Mark Forums Read




03 - Accounting & Taxes Accounting Help & Tax Strategies

Reply
 
Thread Tools Display Modes
  #1  
Old 12-19-2004, 11:07 PM
vudu2k vudu2k is offline
Member
 
Join Date: Jul 2004
Posts: 56
Default C-Corp Bonuses vs. Dividends

I've read that it is tax-advantageous to have your C-Corp pay you "Bonuses" instead of Dividends because they are deducted from the corporate income (the corporation doesnt pay taxes on them, but you do personally). My question is this:

(1) Are bonuses taxed as income or capital gains on your personal return? Do you have to pay FICA/Medicare on these?

(2) I assume dividends are taxed as capital gains personally, and are taxed at the corporate level too. Do you have to pay FICA and Medicare on these too?

Thanks to anyone who can comment on this!
-Dan
Reply With Quote
  #2  
Old 12-20-2004, 11:31 AM
OldJack's Avatar
OldJack OldJack is offline
Registered User
 
Join Date: Aug 2004
Location: Missouri
Posts: 1,710
Default

Quote:
Originally Posted by vudu2k
(1) Are bonuses taxed as income or capital gains on your personal return? Do you have to pay FICA/Medicare on these?
A bonus paycheck is just another paycheck treated the same as any other paycheck subject to all payroll withholding and employment taxes. Call it bonus, salary, overtime pay, vacation pay, etc., it all is the same and reported on your W2 at the end of the year. For a C-corp paying owner wages means that payroll taxes are costing 15.3% plus the 1040 tax is likely in the 15% or more tax bracket for a total cost of 30%+.

Quote:
Originally Posted by vudu2k
(2) I assume dividends are taxed as capital gains personally, and are taxed at the corporate level too. Do you have to pay FICA and Medicare on these too?
Dividends are paid only from a C-corp earnings and are not treated as a payroll item so there is no withholding or employment tax. Dividends (not to be confused with an S-corp distribution) are taxed on the 1040 Sch-D at a maximum tax rate of 15%. Since the C-corp has also paid at least 15% tax that makes a small business owner actually paying 30% on the income. If the owner is in a higher tax bracket than 30% it makes since to pay dividends.
Reply With Quote
  #3  
Old 12-20-2004, 01:46 PM
vudu2k vudu2k is offline
Member
 
Join Date: Jul 2004
Posts: 56
Default

Thanks for the concise answers to my questions, OldJack. I'm starting to see that if you run a small C corporation, then a good minimal tax strategy would be to pay yourself a reasonable salary/bonus that would keep your corporate profit below $50K (so that you can stay in the 15% corp tax rate). Then, pay yourself some dividends at the effective 30% rate (15% corporate + 15% 1040) .

As compared to an S-Corporation, the dividend could be comparable to a distribution except that your effective tax rate could be actually lower with a C-corp since the S-corp distribution is already taxed at your 1040 bracket (often above 30% if you're making a decent living). If I'm wrong on this, let me know..

OldJack, do you do business in Virginia?

-Dan
Reply With Quote
  #4  
Old 12-20-2004, 02:41 PM
OldJack's Avatar
OldJack OldJack is offline
Registered User
 
Join Date: Aug 2004
Location: Missouri
Posts: 1,710
Default

You are getting it all sorted out Dan. A C-corp with high profits can save taxes if you balance the corporate taxes with the individual taxes and manage the benefits available. I like C-corps if you are willing to do the bookkeeping and manage the operation with good planning. I only do business in Missouri and that is limited as I am in the retirement mode. LOL
Reply With Quote
  #5  
Old 12-20-2004, 09:32 PM
vudu2k vudu2k is offline
Member
 
Join Date: Jul 2004
Posts: 56
Default

Quote:
Originally Posted by OldJack
You are getting it all sorted out Dan. A C-corp with high profits can save taxes if you balance the corporate taxes with the individual taxes and manage the benefits available. I like C-corps if you are willing to do the bookkeeping and manage the operation with good planning. I only do business in Missouri and that is limited as I am in the retirement mode. LOL
Thanks Jack. Too bad for me and other businesses that you're retiring! But congratulations and I'm sure you're enjoying it. It's very kind of you to give back to the small-biz community so much knowledge. I think that I'll be better armed when I select a CPA now.
Reply With Quote
  #6  
Old 12-21-2004, 07:59 AM
OldJack's Avatar
OldJack OldJack is offline
Registered User
 
Join Date: Aug 2004
Location: Missouri
Posts: 1,710
Default

You are welcome Dan. My plan is to retire from active CPA practice, but I will probably still be around on this or other forums. Glad to here that you will be obtaining a CPA for your business. It is a very wise man that surrounds himself with wise advisors. CPA's don't know everything but they generally know more than others about taxes and business. I learn something new everyday.
Reply With Quote
  #7  
Old 12-24-2004, 09:22 PM
RichardOvervold RichardOvervold is offline
Junior Member
 
Join Date: Dec 2004
Posts: 22
Default

This one's for OldJack, I've been watching your advice carefully. Also, I'd like for you to join another forum to share you useful knowledge in your spare time. If you're interested, email me at rick@fundslender.com for the information on the other forum.

Nevertheless, lets get to the point. I'm trying to work out the bugs of my plan here. I own a LLC, I have the option at this point to be taxed at C-Corp or S-Corp now. I'm not sure if you're allowed to share numbers on this forum, but here's small example with a bit of variations in the numbers. I run an affiliate marketing business in which the gross income is around $20k per month, and expenses are around $10k per month minus payroll, and I'm the only employee, so I set the rate. That $10k is with everything included, and everything factored in as far as projected accounting fees, and any overhead, which is small because this is a homebased business, no rent, nothing other than webhosting, ect. Point I'm getting at is that I've made this my average for the past several months, and at the point I'm at, the profits, and numbers will only rise. Using the numbers I've projected, I'm looking at about $120k profit each year with the option to go as an S-Corp, and pay the profit to myself at $120k per year, and taxed at the max rate. OR, C-Corp, pay myself a salary to keep the IRS happy and work on purchasing rental properties with the rest of the profits left. Of course on the personal side of things, instead of paying my mortgage from my personal account which can't happen since I'm paying myself a minimum, I'll be paying my mortgage from the business account, writing off my business office from my home, and what's left after the writeoff is considered profits still, or personal loan, not sure about that part. I guess what I'm really trying to ask is, if I can get my net profit down to under $50,000 would it be better for me to use a C-Corp, pay corporate taxes of 15% on my $50,000 which would be $7,500.00. From your other post, I'm assuming that this amount would then be taxed again at 15%, or would it be on an individual tax bracket? Assuming that it's on a 15% corporate tax, again, I'd be taxed on $17k which those taxes would be $1,125.00, for a total tax of $8,625.00. Not counting the personal taxes I'd take. If I took $200 paychecks during the year on a weekly basis, my total taxable income would be $10,400.00. Which would be in the lower brackets. So say I was taxed at 30% on personal taxes, that would be $3,120.00. Overall, I'd be taxed $11,745.00 including personal 1040 taxes and without using some socalled "shifting" method. If you could shine some light on this "shifting" thing, it would be appreciated as well.

Now lets take if I was just taking paychecks on the profits as a S-Corp after writing off as much as I could to get me down to $50k profit which could be difficult in itself doing it this way. I'd be taxed on $50k as an individual. Not sure what the rate is, but it's alot. 37%? Lets say for the sake of this post, I've be taxed at 35%. $17,500 would be the taxes I'd be paying for the year. Which seems more delightful to you? Let me know if I'm way off on this analogy here, and help me to clear things up a bit. Remember though, each year, I'd probably have to try and write off $70k worth of expenses, and don't exactly know if I can do that. Also, those tax numbers are without the business side medicare/SS numbers too.

Keep in mind that I'm 25 years old, and just getting started here.

Given this info, what would you do?
Reply With Quote
  #8  
Old 12-27-2004, 04:28 PM
OldJack's Avatar
OldJack OldJack is offline
Registered User
 
Join Date: Aug 2004
Location: Missouri
Posts: 1,710
Default

Richard,
Taxes are a prime reason to select a particular entity for your business, however, it is only one reason. The old saying of one size does not fit all is true. You must also consider other reasons such as do you want the money out of the business now (and pay tax) for personal investments or do you want to take the money out later (pay tax later).
Quote:
Originally Posted by RichardOvervold
I own a LLC, I have the option at this point to be taxed at C-Corp or S-Corp now.
The election for a LLC to be taxed as a corporation is supposed to be at the beginning or before a year not after. Revenue Procedure 2003-43 allows automatic relief for certain inadvertent late S corporation elections and Revenue Procedure 94-48 still applies for certain other situations.

Personally, I do not recommend a LLC to elect to be taxed as a corporation. My feeling is that if you want a corporation then incorporate, although many advisors do recommend the LLC electing S-corp tax status.
Quote:
Originally Posted by RichardOvervold
and work on purchasing rental properties with the rest of the profits left.
Small Business Corporation Rule #1: Never put real estate or land into a corporation. Reason: A C-corp has to pay regular tax rates on the sale gain as a C-corp does not get a capital gains tax rate. Then you have tax again when the money is taken out by the shareholder. (the old double tax). An S-corp has sale with capital gain passed to shareholder for tax which is not so bad, however, if you accidently terminate the S election you automatically become a C-corp with possible double tax.

Small Business Corporation Rule #2:
Never put any property or equipment into a corporation that you may want to take back out later. Reasons: A corporation distributes assets to shareholders as a "deemed" sale at fair market value with taxable gain even though you still have the property or equipment now owned personally.

An LLC taxed as a sole proprietorship (1040) or partnership (1065) is an excellent entity to own and operate rental real estate.
Quote:
Originally Posted by RichardOvervold
Of course on the personal side of things, instead of paying my mortgage from my personal account which can't happen since I'm paying myself a minimum,
I'll be paying my mortgage from the business account, writing off my business office from my home, and what's left after the writeoff is considered profits still, or personal loan, not sure about that part.
A business is not allowed a deduction for writing off a home mortgage or mortgage payments. A corporation is allowed a deduction for reimbursing you for certain office-in-the-home expenses as calculated by a worksheet in IRS publication 587,"Business Use of Your Home".

If a C-corp were to make your home mortgage payments it would most likely be considered a taxable dividend. If a S-corp made home mortgage payments it would most likely be considered a cash distribution not taxable unless all distributions exceeded your profit and investment basis.

---
At your age 25, A C-corp with profit of say $100,000, could be a good option where you take a W2 salary of say $40,000, a SEP retirement contribution of $10,000 ($40,000*25%= $10,000) and leave $50,000 to be taxed (50,000 * 15%= $7,500) by the corporation. The $50k not taxed further until later years taken out as dividends now taxed at 15% but later may have no tax or a lower tax rate as the tax law changes.

Your $40,000 W2 would result in 1040 income tax (assumed unmarried) of about $4,762.50 (40,000- single person standard deduction $4,850 - $3,050 one exemption = $32,100 taxable * 25%= $8025 - 3262.50 = $4762.50) plus payroll taxes of $6,000 (7.65% withheld + 7.65% paid by business) for a total of around $10,762.50.

----

On the other hand At your age 25, An S-corp with profit of say $100,000, could be a good option where you take a W2 salary of say $40,000, a SEP retirement contribution of $10,000 ($40,000*25%= $10,000) and take the remaining profit of $50,000 in cash distribution to invest in real estate owned and operated in a LLC.

An S-corp does not pay taxes so your personal 1040 taxes would
to be taxed ($40,000+50,000-10,000 SEP - single person standard deduction $4,850 - $3,050 one exemption = $82,100 taxable * 28%= $22,988 - 5,373 = $17,615) plus payroll taxes of $6,000 ($40,000 at 7.65% withheld +7.65% by business) for a total of around $23,615).

There are a lot of ways that would give entirely different results so I would suggest that you can afford to have a CPA calculate and show you a variety of different results.
Reply With Quote
  #9  
Old 12-27-2004, 06:29 PM
Evan's Avatar
Evan Evan is offline
Registered User
 
Join Date: Oct 2004
Location: Rhode Island
Posts: 1,280
Send a message via AIM to Evan Send a message via MSN to Evan
Default

That's definitely great to see how you crunched out some numbers, OldJack. I wish there was some type of calculator what would figure out estimates like that, assuming any type of company with no employees and what you'd end up paying if you were a sole pro., partnership, LLC, S-Corp, C-Corp, etc.

I'm wondering why you feel that LLC's shouldn't elect to be taxed as an S-Corp. Is it because there is no incentive or just a personal belief.
Reply With Quote
  #10  
Old 12-27-2004, 09:05 PM
OldJack's Avatar
OldJack OldJack is offline
Registered User
 
Join Date: Aug 2004
Location: Missouri
Posts: 1,710
Default

Because of confusion and misunderstanding that causes possible tax surprise to the taxpayer. If you have a good CPA advising all tax transactions for a LLC taxed as a S-corp I would not have a problem with it. An LLC was primarily created to separate your personal assets from the company assets to protect your personal assets (read home) from lawsuit which really was a business lawsuit. In the eyes of the IRS the LLC does not exist for tax purposes. There are huge difference in taxation of an LLC taxed as a partnership verses an S-corp and individual taxpayer/owners don't usually realize the difference until they have made a mistake. You know, my friend (read tax expert) has a LLC (proprietorship) and he was able to take that backhoe out and put it in his other business without paying a tax why do I have a tax from my LLC (S-corp election).
Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

vB code is On
Smilies are On
[IMG] code is Off
HTML code is Off
Forum Jump


All times are GMT -5. The time now is 04:09 PM.


Powered by vBulletin™ Copyright © 2011 vBulletin Solutions, Inc. All rights reserved.