I own a company that is grossing about 3.5 million this year with a net of about a million. I have only given myself a 70,000 dollar salary. My COO is making $120,000. Do I need to give myself a raise to be compliant with the IRS? In other words, will they think I'm just trying to skirt paying higher taxes by giving myself quarterly bonuses? I thought I could say that the COO is really running the show. I'm just working 10 hours a week. I also own 2 other profitable businesses so I could sort of get away with saying I only work 10 hours a week there because I need time on the other businesses but they are not generating even close to what this one is.
Hi my name is XXXXX XXXXX I will be helping you today with your tax question. You are fine paying yourself that salary. The only stipulation is that you pay yourself a "fair" salary and that is very ambiguous. $70,000 a year will be acceptable they will not cause issues on this because you personally pay the full FICA (social security and medicare) taxes when you report the bonus income on your 1040 as self employment income. So in the end it all works out, by paying yourself the lower salary you have less employment tax owed under the business, but pay that employment tax on your 1040 personally.
Hello how are you
Ok. Thanks. I've heard from a couple people here that it may throw up a red flag and I could get audited which I don't want to happen of course. I believe you are correct and thanks for the advice.
You are welcome. You will be fine, if you paid yourself nothing and then paid bonuses from the business in the form of non wage income that is a different story, but $70,000 is reasonable.
great. Thanks. One last question if it's ok. We just bought another company and I pulled $200,000 out of
company 1's account to buy company 2. Will this $200,000 have to show up as income or can it be an expense because we bought another company with the profits from company 1?
So this is a completely separate question correct?
yes. Do I need to put it in a different way?
In the future you should submit each question separately but it is okay. What type of business is company 1 and company 2 (s corps, c corps, llc, etc)
company 1 is an s-corp. We bought a division of another company and the real estate and all equipment so we formed a new LLC for the second company. So it was a real estate plus asset purchase.
And who owns the LLC, is the S Corp the owner of you and your partners individually own the LLC
I own both companies personally. So both companies are separate entities. I have no partners. company 1 doesn't own company 2.
Okay 1 last question then, was the $200,000 taken out of the current year's income and included on the K1, or was it just taken out of cash account that was already income earned in prior years.
It was just taken out of company 1 45 days ago so it would be current year income. I haven't included it yet on any tax filings.
Any profits of an S Corp are taxed annually, you pay tax on any net income which is reported from the S Corp to you on the K1 which you then put on your personal 1040. So regardless of whether you physically take the profits out of the business each year you are taxed on them all. Whatever profits you leave in the S Corp adds to your basis (your investment) in the business. If the $200,000 was more than this years net income then you are reducing your basis because you are taking out more than you profited. So basically yes, the $200,000 is taxed, but it would have been taxed even if you didnt' use it to buy the other business. The $200,000 will then be your basis in the new LLC.
ok. thanks. That is what I thought. It's too bad it has to be taxed if invested again. It's certainly not going into my bank account and it is being used to employ another 12 plus people. But I digress into politics. Thanks again. I'm really glad I found this service. It's very cool. Just what I needed.
The $200,000 is not an expense for Company 1, the S Corp, but you would place a value on the assets which are now owned by the LLC and depreciate them over their useful life, so each year you are taking a portion of the purchase price as an "expense" for the LLC and thus reducing your current year and future years taxes for the LLC so you get it back in the long run, it is just taxed first as income because its from a different entity.
You are welcome, if you ever have any more questions please let me know I am glad I could help!
Is there anything else I can do today to make sure you are satisfied with my service provided?
Well it seems the more questions I ask the more I have. I'll try and ask via a new thread. Stand by.