Quote: (07-15-2014 07:29 PM)tarquin Wrote:
Quote: (07-15-2014 06:03 PM)nomadicdude Wrote:
I don't know about Canada but in the US Business Bob would pay less in taxes, possibly significantly less. First, he can deduct all his "business expenses" which if he is smart includes a lot of shit that really is personal but disguised as business expenses. He'll have formed an S Corp and use it as a pass thru entity so that he does not have to pay FICA taxes on all of his income. He can just take wages out of the business of around 50k, paying FICA taxes on that portion, and then take the remainder as dividends and just pay ordinary income tax.
Finally, and perhaps most importantly, he can set up his 401k so that his total employer and employee contribution is 17.5k a year PLUS an additional 25% of his additional compensation so under your example he would probably be able to give around 40k to his 401k plan, part of which is tax free (the employer contribution would be tax free).
So all in all Bob would pay less in taxes than the employee. This is for America only which of course has exceedingly favorable taxes for business owners (mostly so that Republican finance types can completely rape the system).
It's not a round number of $50,000. It is based on "reasonable compensation." If you have a very profitable S-Corp, reasonable compensation may be in the 100's of thousands.
Yeah, didn't mean to make it sounds like 50k was the proper number but I think anything in the 40k to 60k range is a safe range if you are making in the 100k's. People get in trouble when they simply do not pay anything to themselves as wages or a really low amount like 15k. And yeah, if the S-Corp is generating 300k or more then 50k may not do the trick but I think the worse thing that happens is the IRS recharacterizes a portion of the non-wage comp as wages subject to FICA and you pay a modest penalty so in some ways it is worth risking it. I hate the IRS for having ambiguous standards like this that are impossible to interpret.