If you own a business, you must pay yourself a salary
Bryon asked FSB about his salary on his company’s payroll. How did you decide how much your salary should be?
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Diggwhy would you put this online… he may now get in trouble with the IRS.
(FORTUNE Small Business) — Dear FSB: My wife and I are owners of a small,
incorporated business. We are the sole officers of the corporation. Will we
come out ahead financially by removing ourselves from the corporate payroll
(i.e., avoiding the corporate payroll taxes) and paying ourselves strictly
by way of dividends?
- Bryon Sidwell, Indianapolis
Dear Bryon: Be careful. Removing yourself from the corporate payroll and
paying yourself through only through dividends is actually illegal, and it
may result in an audit of your business.
Are dividends tax deductible to an “S” Corp? I did not think so, in which
case you pay taxes twice on the money, once through the company and once as
an individual. If not so, then may be it is better to have income as a
dividend.
I’ve read through a lot of IRS code but don’t ever recall this. Where is
the code at to verify & follow.
thanks
dougb
My wife and I have a small part time internet business that brings in
revenue of about $10,000 and our expenses are about $6,000. (expenses
include web site programming, hosting, advertising and marketing) We don’t
pay ourselves anything. Are we allowed to dip into that $4,000 remaining
dollars for non business items. Example, a family vacation?
Just wondering? Thanks, Tom
If it is illegal for a business owner to pay themselves a very low salary
(to avoid certain income tax rates), then how do people like Steve Jobs get
away with paying themselves a salary of only $1 a year – or is the press not
telling us the full story?
You keep referring to corporations here. Are the rules more lax for LLCs? What if I don’t pay my self salary, but I take a deduction for continuing educational expenses that are directly relevant to my needed business skills?
So how does the Google founders pay themselves $1/year and get away with it?
Not at all. In that case you are not paying yourself dividends and thus the concern doesn’t even apply. You’re just a struggling business owner.
Of course, if your expenses include remodeling your home office to add an indoor pool and dance floor, and your benefits include a Range Rover lease for you and an Audi for your spouse you’ll be risking audit, but for a different reason. 
Pay yourself enough to maximize your retirement contribution, even if it’s more than the commensurate of your imaginary replacement. If you have a SEP IRA you can contribute $46,000 in 2008 but only up to 25% of your wages. So if you are lucky enough to be able to pay yourself $184,000 do it. You’ll likely earn back those additional payroll taxes many times over.
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We have a 412-I retierment plan so my salary was determined to what extent the sub-S could fund the plan. Pretty simple, actually. The plan Administraor figured outr for me.