IRS Goes After Executive Whose Pay Is Too Low

Targeting executives who pay themselves too little in order to shield some of the money they make from taxes, the IRS is focusing its sunshine-concentrating magnifying glass on potential offenders.

The Wall Street Journal reports the IRS successfully sued an Iowa CPA who classified his business as a “Sub-S” corporation, meaning he was the sole owner and shareholder in the company. The CPA reported that in years his Sub-S was part of a firm that made six-figure profits, his annual salary was only $24,000. The low salary saved the accountant $20,000 in payroll taxes, triggering the IRS to cry fowl. District court ruled the CPA had to pay back taxes plus interest and penalties.

The story says there are 4 million Sub-S corporations in the country. And any of those owned by people whom the IRS may deem paid themselves too little will take a collective gulp right about now.

The IRS Targets Income Tricks [The Wall Street Journal via Slashdot]

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  1. PunditGuy says:

    Can he sue himself for giving himself bad tax advice?

  2. LeonardoLeonardo says:

    “triggering the IRS to cry fowl”

    *cluck cluck cluck buckaw!*

    • 339point4 says:

      +1

      When I got to “cry fowl” in the article, that *cluck cluck cluck buckaw!* mental image caused me to burst out laughing and I then had to explain myself to bystanders. I’m still chuckling.

  3. winstonthorne says:

    So they cried “fowl” when he DUCKED his taxes? (Couldn’t resist).

  4. DevsAdvocate says:

    Stupid Government picking on the little guy.

    • Applekid ┬──┬ ノ( ã‚œ-゜ノ) says:

      Bingo. Execs for huge conglomerates often pay themselves a token salary of $1… and I don’t see the IRS only knocks on their doors when it’s time for the end-of-quarter financial social.

      • dpeters11 says:

        Executives like Steve Jobs may take a salary of $1, but if they don’t handle their bonuses, stocks and in Steve’s case of living money, dividends, the IRS will come calling. Just because you only take $1 salary doesn’t mean you are compensated tax free.

        • AnthonyC says:

          Stocks and dividends, though, are taxed at lower capital gains rates.
          It sounds like in this case, the man who was the sole shareholder was taking little salary and mostly capital gains. I expect there is a legitimate legal difference between the two cases, but if so, it seems arbitrary.

      • Papa Bear says:

        That $1 thing is urban legend that goes back to WWII when business execs and wealthy people went to work for the government for $1/year. I’d like you to point to one example of a dollar a year man today.

        Considering this guy is a six-figure earner, he is not the little man. He may well not be the big man, but he sure a I’m fat, he’s not little!

        • Harry Manback says:

          Somebody mentioned Steve Jobs, but the CEO for Citigroup had a $1 salary last year. It has since been raised, but it is no legend or myth, it still happens. Also, Larry Page and Sergey Brin have $1 salaries. In fact, the list is quite long so I’ll just leave this here http://www.paywizard.org/main/VIPPaycheck/dollarsalaryclub

        • Papa Bear says:

          So maybe there are some $1/year guys, but they are few and far between. Also, there is full disclosure and proper reporting so that all income is taxed accordingly. In this instance, money is being allocated to profits and taxes are paid on the profits but not on a reasonable salary. When the $1/year guy pays taxes, it is not on corp. profits but on personal income. CPAs have been pushing small businesses into this for years. I know at least three people who are set-up this way.

        • AllanG54 says:

          Mayor Bloomberg in NYC only takes $1 a year in salary. Of course he’s a billionaire from his business ventures.

          • Galium says:

            Bloomberg is so rich he can buy elections. Mandates of the people are just for the slightly rich. The super rich just ignore mandates, they are above such nonsense as people voting, democracy or republics.

        • DevilDucky says:

          I used to work for one. He had made his fortune elsewhere, and started a non-profit organization as a “retirement project.” He paid himself a salary of $1, and ceremonially donated that dollar back to the organization every year.

  5. SG-Cleve says:

    So now the IRS is going to tell businesses how much salary they have to pay?

    • LeonardoLeonardo says:

      What’s next, the FDA telling meat companies how much salmonella and e. coli can be in their products? LET THE FREE MARKET DECIDE.

      • jesirose says:

        Right, because a business paying it’s sole employee is EXACTLY like a business selling food to consumers.

        • LeonardoLeonardo says:

          I was more arguing that, yes, this is in fact exactly the IRS’s job.

          Also, this has nothing to do with telling companies how much they should be paying employees. It’s about the IRS trying to incur additional taxes on money the guy was ALREADY earning, taxes which he was getting around.

        • Sneeje says:

          There’s a difference between telling a company what they can pay and telling them that they have to *accurately report* what they pay. That’s the issue here.

          • jesirose says:

            I don’t know an accountant who DOESN’T do this. Half my money gets taken away already, why would I want more of it being taken away when the tax code ALLOWS you to do this? If they’re only going after this one guy, they’re missing millions of others. Are they going to change the code?

            • RvLeshrac says:

              There’s a section of tax code that allows you to commit fraud? Where?!

              • jesirose says:

                How is it fraud? This guy pushed the line, he should have had a more reasonable salary, but fraud implies you’re breaking some rules. The rules say you have to pay a reasonable salary. As many people have mentioned, big CEOs pay themselves $1, and then make it up in stock. How is making it up in dividends fraud?

    • denros says:

      no, they’re telling them that hiding what they’re paying the CEOs is not cool, dude.

    • sirwired says:

      No, but they are going to say that if you consistently take large cash profit distributions from your Corporation of which you are the sole shareholder, the IRS is going to consider that to be payroll if the “salary” you are paying yourself is well below industry norms.

  6. GMurnane says:

    As much as I hate tricks like this to avoid taxes, can the IRS really dictate the “right” salary for someone?

    • unsmith says:

      The problem is in the difference between salary (i.e. payroll) and profit distributions. PD’s are not subject to social security and Medicare taxes, so by undercutting his “salary”, he pays less taxes.

      The CPA makes the same amount of money each year, the only question is how much is reported as “salary.” He’s basically ducking paying taxes on money he makes.

    • wrjohnston91283 says:

      It’s not so much that they are dictating how much salary to pay, but rather how the income is classified.

      For example, lets say I own a small business that has $100,000 in profit, before paying myself anything. I can pay myself nothing, and pay only income taxes on that $100,000, since S-corp income is taxable on the owner’s individual return. Lets call it $25K in income taxes. What the IRS is doing is making him reclassify some of that profit was wages rather than S-Corp income. The income tax doesn’t change, since both S-Corp income and wages are taxed on the individuals personal tax return, so moving $100,000 to wages from S-Corp nets to no change. However, both he and the corporation need to pay FICA on the $100,000, which works out to an additional $15,300 (there would be a small decrease in corporate profits since the business share of FICA is deductable). It’s all about substance over form – he worked for the S-corp, and thus the earnings are “wage compensation”. It doesn’t matter the form of the transaction – rather the economic substance.

      The IRS isn’t going after execs who make $1, since (for the most part) they make up for it in options and stock grants, and those corporations are not S-Corps, and the tax structure is different. The substance over form test isn’t met in those cases.

      • GMurnane says:

        But what I have a problem with is the fact that his “salary” wasn’t totally outrageous and as a business owner I think he should be entitled to choose what salary he wants. Sure its kind if cheating the system by underpaying himself to avoid payroll taxes, but what does the law say on the matter? If it says no unreasonable salary allowed, I for one would say his salary isn’t that unreasonable. Its unfair for him to duck out on taxes like this, but how clearly illegal were his actions? The IRS shouldn’t go after people if their actions weren’t definitely or likely illegal.

        • GrimJack says:

          For the most part, the IRS has always looked at what a comparable salary would be for a person working in a position where they aren’t the sole owner/shareholder. For example, my wife has an S-Corp for graphic design business where she is the sole employee. If she takes a salary of 50k a year, and the IRS deems that 50k is a reasonable salary for a graphic designer, well then there is no trouble. Now a doctor in private practice as an S-Corp that takes a 20k a year salary while reaping 300k of pass-through profit each year would trigger some red flags, as doctors generally make a lot more than that.

          I started my own company last year and am the sole employee and I struggle with the same issue – how much to pay myself and how much to take as S-Corp income. The only thing that you really save on is SS/Medicare tax. S-Corp income is taxed the same as salary for federal/state purposes, but it is exempt from SS/Medicare tax (and the self-employment tax).

      • JonStewartMill says:

        That was a levelheaded, well-reasoned and insightful explanation of the issue.

        What the hell are YOU doing here? [grin]

      • zigziggityzoo says:

        Right, but if I make $1 plus $15m in options, My actual income is still only $1, and on the $15m in options I end up paying a 15% investment tax instead of 36% income tax.

        Thus, I avoid the 15.6% FICA tax AND 21% in income taxes.

        So the big guy wins (MORE), and the little guy loses.

        • wrjohnston91283 says:

          The $1 salary CEOs are actually a bad example, since they aren’t sole owners of the company, and the tax structure is economically different. In the case of sole owners, it boils down to the fact that the sole owner worked at the company, and as a result the profits of the company comes from their work. The “substance over form” test shows that those profits were the result of his work, and thus the law says they must draw a “reasonable” salary rather than simply moving it to a different line on his tax return. This guy gave himself a salary much lower than what was deemed reasonable, and the IRS caught him on it.

          • zigziggityzoo says:

            So the real difference here is the rules for which we choose to create and obey.

            The little man has his own set of rules, and the rich man his.

            Once (if) the little man gets rich enough, he can change his own game and follow a different set of rules.

            So what if it were a partnership-owned business? What about a “Trustee” owned business with two or three trustees? At what point is it OK to dictate your own income?

            What if the partnership were husband and wife?

            • wrjohnston91283 says:

              It’s not little man vs rich man. Its S-corp rules (pass through income, taxed individually) vs C-Corp rules (no pass through, taxed at corporate level).

              Husband-wife would probably have same problem as this guy, assuming pass through entity.
              Partnership would have same problem as well, as that is pass through, just like S-Corp.

              A trust owned business is either going to be a non-profit, in which case you would’t have a trustee taking a undersized salary since they wouldn’t benefit, or a massachusetts business trust (MBT), which isn’t recognized for federal tax purpose.

  7. lupis42 says:

    And yet they allow the Google executives to do the same thing. Maybe they fear the lawyers Google could bring to bear?

    The IRS: picking on the people who can’t fight back.

    • SG-Cleve says:

      Do you mean the guy who announces in the press release that he will work for $1 salary… but fails to mention the millions in stock options he’ll get as a “bonus”?

      • MrEvil says:

        If those stock options are anything like the ones I get from my employer here’s how it goes. the $1/yr CEO gets double-taxed. He gets taxed ONCE when the stock vests as income or compensation(in which case a portion of the vested stock is sold to cover due taxes.) and then gets taxed again via capital gains when the stock is sold. They’re really not trying to hide any income from the IRS, they’re just linking their paycheck directly to the company’s performance rather than a fixed amount regardless of weather the company is successful or failing.

        • Kate says:

          Wouldn’t the capital gains tax, only be on the amount the stock is worth more than when he first received it? So it would be the same stock, but on new value?

      • lupis42 says:

        They’re working for the same $1 salary as the guy in the article, and like him, taking most of their money from profit/stock options, which means that they don’t pay Social Security or Medicare taxes.

        I’m OK with corporate types getting their pay from profit/stock options, as that’s at least vaguely tied to their performance, but it seems sort of stupid for it to be OK for people to make millions a year that way and, by not paying themselves a fixed salary, not pay payroll taxes, while it’s not OK for people to do the same thing with thousands or tens of thousands…

        • sirwired says:

          You DO pay SS and Medicare on Stock Grants and Options. This guy was taking “profit distributions” (essentially dividends), which are not generally subject to payroll tax.

    • sirwired says:

      This is completely different. When a Google (or other corporate exec) gets “paid” a dollar, they usually take their “real” compensation in stock options or stock grants. Stock grants are treated (and taxed) like payroll expense. For options, the discount at the time the options are cashed in is treated (and taxed) like payroll expense.

      In short, getting paid in stock options happens to defer the payroll tax until the time the money is actually collected, but it does not make the tax go away.

      Also, I can guarantee that payroll tax deferral is NOT the reason they choose to get paid in stock… the maximum amount of Medicare and SS taxes is so puny, it’s not even a rounding error for those CEOs.

    • BigMick says:

      Seriously?!? “Picking on the people who can’t fight back?”

      This is not the same thing as Google Execs at all. Those are stock options are taxed at both the corporate level, and then again as personal income. They could even be taxed as capital gains, which at those amounts could be taxed at a HIGHER rate (39.6%) than personal income (highest rate 35%)

      Back to the “picking on those who can’t fight back” comment:

      1. This guy was a CPA. Presumably he knew the rules or should have.
      2. He COULD and DID fight back. But he lost. In court. Not Tax Court, District Court.
      3. He got greedy. He likely would have been fine if he had paid himself at least what the average CPA would normally make.

      Sounds more like the IRS is picking on somebody who was deliberately flouting long-time rules which he knows, with the express intent of hiding income.

      • BBBB says:

        “This guy was a CPA. Presumably he knew the rules or should have.”

        I had a talk with my accountant on this topic at the end of the year. We
        decided on an amount of pay such that the standard withholding would cover
        the tax on the company profit. That was his conservative line for avoiding
        attention from the IRS auditors. [I didn’t want to test the limits, so I asked
        for the conservative amount.]

      • David in Brasil says:

        I’m a Ph.D. Chemical Engineer. Yet when I made a mistake on my payroll taxes a few years ago, the IRS refused to consider that it may have been a mistake, insisting that I was “too highly educated” to have made that mistake. They came down on me with both feet – penalties, interest, threatened to take my house, everything. I decided to never OWN anything that the IRS could ever put a lien on again.

        So, maybe he did know what he was doing. But the IRS’ say-so doesn’t make me automatically believe it.

  8. Straspey says:

    “…triggering the IRS to cry fowl.”

    Okay – I’ll play…

    He should have given them the bird.

    He may try to fly the coop.

    That guy really laid an egg.

    It’s never a good idea to play chicken with the IRS.

    Next…

  9. Heresy Of Truth says:

    Wow. This guy totally violated every basic accounting principle we’re learning my my college accounting classes. He did this to lower his reportable net income, and lower the taxes. He’s a CPA, how can you be a CPA and violate GAP so flagrantly.

    • Blueskylaw says:

      The same reason why Willie Sutton robbed banks – because that’s where the money is.

    • slyabney says:

      Besides the fact that he’s not violating GAP since the accromyn is GAAP (general accepted accounting princeples).

      You should have learned in accounting that people will do anything to get around the law, until they get caught. See Enron to start.

    • Bsamm09 says:

      No. 1 — It’s GAAP not GAP.
      No. 2. — Income Tax based accounting is different from GAAP

  10. Loias supports harsher punishments against corporations says:

    In before someone says the tax code doesn’t need to be reformed to remove loopholes.

  11. Brent says:

    Fair Tax. (Or something like it.) Rather than taxing (“penalizing”) the income achievement of people like this, tax them when they spend the money. And if they don’t spend the money, it goes into savings/investment making borrowing money less costly for those who need it. Or, makes the value of companies increase as unspent money is used to buy stock (higher demand, higher price).

    • faislebonchoix says:

      This. Why should people have to hire a tax preparation service, an accountant, or a lawyer to do their taxes? Meanwhile people in the know cheat their way out of paying. Moving all taxes to a sales tax will save people lots of headache and money.

      • c_c says:

        It will also disproportionally impact lower-income folks, who spend more money on necessities as a percentage of their total income compared to higher earners.

        • jesirose says:

          Necessities like… food, not taxed?

          People who make more money do tend to spend more money. They still buy their necessities, they just buy them at more expensive stores, and spend more on luxury. For the most part.

          • MrEvil says:

            Not all states have 0% tax on essential foodstuffs. Texas fortunately does, but some other states just have a graduated tax rate, things like eggs, milk, raw meat, produce are taxed at a different, lower rate from general merchandise rather than being tax free. Still though if we went to a consumption tax poor people would pay a higher percentage of income in taxes than the wealthy.

          • Egat says:

            per capita they spend way less

        • balthisar says:

          The get rebates.

      • ARP says:

        Why would I want to pay more money in Taxes? I understand from the ultra-capitalists that I need to have the “do what’s best for me and screw everyone else” That system would cause me to pay more in taxes, so I’m opposed to it. It would also hurt the poor tremendously. Before you say “rebate,” you’d need a system to calculate and claim rebates, which puts the complexity back into the system. It would also hurt the economy since the rich simply don’t spend as much on consumer goods, etc. which is the primary driver of the economy. Quite simply, 5 people buying Fords is better than 1 person buying a Bentley.

      • Costner says:

        Any tax system based upon consumption will help stiffle the economy. People buy less when they are taxed more – that is just basic economics right there. In addition to that, the savings people have now have already been taxed, so any consumption based tax will lead to double-taxation (and although the Fair Tax people try to gloss over this, a certain amount of double-taxation would in fact occur).

        Not to mention the fact that if the Fair Tax system is so easy as claimed why did it take them not one, but two books to try to explain it yet people still have questions?

        The first book was over 200 pages and when people had questions that weren’t answered by that book, it took as second book at over 270 pages in an attempt to address them. Yet even after that book there were several other books designed to try and explain the system or put their own little twist on it.

        Doesn’t seem so simple to me.

        You want a really simple tax system? Determine a basic threshold of what it costs the average person to live each year. For example let’s say that amount on average is $25,000. Now say the first $25,000 each and every person makes is 100% tax free. That ensures the lower incomes probably either won’t pay any tax, or they will pay very little tax.

        Next you tie that flat amount to an economic indicator such as inflation, so it automatically adjusts up or down each year without politicians having to get their grubby little hands on it and try to mess or manipulate the number.

        Beyond that number, all of your income is taxed at a flat rate. Whether you make $5 or $5 Billion above that $25k, it is all taxed at the same exact rate. Granted lower income or middle income people will claim that isn’t fair, but it is about as fair as you can get. Nobody is preventing anyone from making more money, and the more money you make the more you would pay in taxes, which is in fact very fair considering the ultra wealthy don’t “use” any more tax revenue than anyone else. They drive on the same roads, rely upon the same military, and have the same politicians – yet they probably benefit from the Federal government less because they won’t get any help from assistance programs.

        No exemptions, no deducations, no credits – just one simple flat rate. If you decide to have seven kids or buy a house or go to college that is your choice and a pesonal decision which should not impact your tax rate. The entire tax form would take about 45 seconds to complete and wouldn’t take even one single sheet of 8.5″ x 11″ paper.

        Done.

        • chargernj says:

          I take issue with the claim that the “ultra wealthy don’t “use” any more tax revenue than anyone else.”

          True they drive on the same roads, but they also own companies and shares in stock and those business entities don’t pay highway taxes in proprotion to the wear an tear caused by those vehicle fleets.

          And yes, rely upon the same military, but I would argued that the shareholders of Exxon, KBR, and other large corporations benefited more from the Iraq War than your average person. And if the shit ever hit the fan and we had a real war, they have a lot more to lose due to the far flung holdings represented in their investment portfolio.

          But really, the same politicians? The Citizens United Ruling has shown that they in fact own most of the politicians. A case where everybody has Freedom of speech, but some are more free than others.

          Compared to the relative pittance they “sacrifice” because they don’t receive government assistance, I don’t think you can compare.

  12. RandomHookup says:

    I took a quick look at the article and the firm distributed between $175-200k to him each year. He only declared the $24k as salary, paying about $20k less in payroll taxes each year than he would generally owe. Seems that he has found a loophole in the S-Corp. compensation rules that should be fixed.

  13. SonicPhoenix says:

    I was just wondering the other day if it would be possible/profitable instead of renting out a house and declaring the income normally to set up some form of corp, sell the house to the corp with myself and my wife as the sole shareholders and distribute the profits in the form of dividends.

    I haven’t done any of the necessary research so this is still in the wacky, theoretically, I-wonder-if-it’s-possible stage but it sounds very similar to what this guy was doing.

    • Mom says:

      It’s different than what the guy is doing. This guy is doing it to avoid payroll taxes (social security and medicare). The corporation is still paying income tax on the corporate profits. In the case of a rental property, you don’t pay payroll taxes. If you do it as a corporation, the corp would still have to pay tax on the property. For a single house, it probably works out better to just own the place yourself.

      In other words, if this were an effective tax dodge, everyone would already be doing it.

      • MrEvil says:

        Plus you’d end up owing tax on the income from selling the property unless you sold it to the corp at some ridiculously low price.

      • SonicPhoenix says:

        As I said, I haven’t done any of the necessary research.

        I had heard that corporations that are structured to pay out 80% or more of profit as dividends are taxed more favorably. Combine that with the fact that dividends are currently taxed at either 0% or 15% and it might have been possible that the favorable corporate tax rate combined with the favorable dividend tax rate was lower than my marginal tax rate.

        I read yesterday that rental income wasn’t subject to payroll tax anyway and there are apparently enough deductions and depreciations that it probably won’t work out to be more profitable to incorporate but it was just an idea bouncing around in my head.

    • Bsamm09 says:

      One of the first rules I learned in accounting — DON’T PUT REAL ESTATE IN A CORPORATION!!!

      This goes for appreciating property (real estate usually is).

      Corps – Prop in at basis, out at FMV
      Partnerships – In at Basis, out at Basis

    • econobiker says:

      That only works if you own #1 company that rents real estate from #2 company or from you personally. Then you can have #1 company pay what ever rent you want and you get profits from it.

      I know this deal as one past employer’s sole owner had a separate company that owned one of two the facilities the company used. He still owned the 2nd facility real estate even after he sold the company to an equity firm.

      This probably won’t work for an individual unless you owned two properties and claimed to be living in the higher value property and renting out the lower value property under the business. Then rent the higher value property at a higher rent and live in the lower value property and skim the difference in rental fee value between the two. Of course this might be illegal so do it at your own risk.

      (However, my sibling is currently in litigation due to her former job as property manager for a creep apartment complex owner who had two sets of books – one for real and one for the IRS which understated the actual rents collected. Nice.)

  14. lupis42 says:

    They’re working for the same $1 salary as the guy in the article, and like him, taking most of their money from profit/stock options, which means that they don’t pay Social Security or Medicare taxes.

    I’m OK with corporate types getting their pay from profit/stock options, as that’s at least vaguely tied to their performance, but it seems sort of stupid for it to be OK for people to make millions a year that way and, by not paying themselves a fixed salary, not pay payroll taxes, while it’s not OK for people to do the same thing with thousands or tens of thousands…

    • EarlNowak says:

      GRANTS OF STOCK OPTIONS ARE SUBJECT TO PAYROLL TAX.

      They’re deferred- the payroll tax is triggered at sale, not at grant. BUT THE GRANTOR STILL HAS TO PAY THEM.

      • MrEvil says:

        My employer compensates me partially in stock options. When the shares vest the company will sell off a portion of the vested shares to satisfy any tax obligation. THEN when I sell the stock I’ll also owe capital gains tax.

  15. BigMick says:

    When I started my business 18 years ago I thought of this trick: paying myself minimum wage, and taking most of my salary as a dividend. It works because corporate earnings are taxed at a much lower rate than personal. Retaining those earnings in the corporation and taking most of your salary as a dividend, avoids the Social Security and Medicare deductions – not only what you pay, but what the company pays into the system on your behalf.

    My “cheapest guy I could find who was also teaching part-time at the local community college for extra money” accountant at the time advised me against this strategy.

    That’s a long winded way of saying his CPA sucked.

  16. CharlesFarley says:

    When will the IRS crack down on retained cash positions by US corporation?

  17. Cosmo_Kramer says:

    I know that using the word “executive” in the article title will get the class warfare crowd all riled up, but it’s not accurate. This article isn’t about “executives,” it’s about small business owners – businesses that usually employ exactly one person, the owner. I suppose you could call the sole employee of a business an “executive,” but most people wouldn’t.

    • Duke_Newcombe-Making children and adults as fat as pigs says:

      It’s only class warfare when the “wrong” class fights back, my friend.

      • Cosmo_Kramer says:

        It’s not my fault you’re poor.

        • Duke_Newcombe-Making children and adults as fat as pigs says:

          Never said it was. I was just addressing your tired, hackneyed cliche about “class warfare”, used by one segment of our political system anytime someone asks uncomfortable questions about why only one percent of the population control over forty percent of the wealth.

          Or, you know…you could just get a new writer. Just sayin’.

  18. benh999 says:

    I don’t get this. Provided his Sub-S was paying taxes on its earnings, why can’t he pay himself a low salary?

    • David Ciani says:

      the issue isn’t about income tax, its about Social Security and Medicare taxes (collectively “Payroll Taxes”)

      • benh999 says:

        What does it matter though? If he wants to spend money on personal expenses, he would have to pay those taxes anyway. It’s not like he is raking in money that he has unfettered access to without paying payroll taxes.

        • Powerlurker says:

          If he receives money as a “salary”, it’s subject to payroll taxes. If he receives it as a distribution from the company that he is the sole owner and employee of, it isn’t. Thus he can save a lot of money in payroll taxes by classifying money he receives as a distribution from his company rather than as his salary.

    • Bsamm09 says:

      S-corps are pass-through entities and do not pay corporate taxes.

  19. jason in boston says:

    S-Corp is not C-corp. This guy deserves what he gets.

  20. JohnDeere says:

    several c.e.o.’s paying themselve only $1 per year better watch their backs.

  21. DragonThermo says:

    Wait, what? First people complain that evil rich people are paid too much (collecting all the payroll taxes, etc. they pay), but if evil rich people are paid too little they are persecuted by the gov’t? Make up your mind, people! Do you want your executives paid what they think they are worth, and collect the payroll taxes, etc., or do you want them to be paid a pittance out of your own jealousy and envy, and lose out on all those sweet sweet taxes?

    • bonzombiekitty says:

      I think you’re misunderstanding what is going on here. The guy in question is pulling in $100K+ a year from his business, but he’s only classifying a small portion of that as payroll, the remaining is essentially dividends he’s paying to himself. He’s paying the same amount of income tax either way, but he’s playing around with the classification of how his company pays him money in order to avoid paying all the payroll tax that he should be paying.

  22. Mold says:

    Umm…st reagan pulled the IRS enforcement off the rich. Most IRS agents would rather go after the wealthy cheats…more money, more challenge, and it leads to more compliance.
    As one who made less than 20K, I have no sympathy for this creep. I paid my fair share..and he just doesn’t want to.

  23. Hoss says:

    If funds were transferred from the Sub S to his personal account, even if it was a loan, and not reported, that is simple tax fraud. I assume most people are like me and don’t record their actual job title on the tax form.. The IRS is picking on Sub S owners only because they are an easy prey

  24. chbrules says:

    I am an S-corp small-business owner. I know exactly this “loophole.” It’s hardly a loophole in the slightest. You are taxed on the fiscal net profit of the business no matter what. It’s pass-through taxation. It’s absolutely absurd that the IRS thinks they can sue someone because they don’t feel they got enough of a cut through payroll. I will follow this case into appeals to see what comes of it.

  25. Midnight Harley says:

    Steve Jobs, etc. :S