Business structures
and taxesAsk the Small Biz Adviser by Stephen
Windhaus • Bankrate.com  Dear
Small Biz Adviser,
I am a college student and have
started a small business. I incorporated for various reasons. Since I am a corporation,
is there anything wrong with not paying myself a salary, but simply declaring
dividends on a regular basis to myself as I am the only stockholder? My reasoning
is that I don't have to pay payroll taxes or spend additional time dealing with
the required paperwork. Thanks for your input. -- Jeff
 Dear
Jeff,
I am curious about the "various reasons"
why you incorporated your business because, in your case, you cannot compensate
yourself exclusively with dividends.
Paying
yourself while avoiding payroll taxes can only be done in an S corporation. However,
there is one big caveat to that procedure: Your compensation, in the form of salary
or wages, must be at a level typical for your category and level of profession.
Remaining compensation can be drawn as dividends. Do
I have you wondering just what is an acceptable level of salary or wage for any
profession? I have discussed this issue with an associate who specializes in the
incorporation process. He indicates there is no fixed schedule of compensation-to-profession
regarding wages and salaries. My
associate notes that it is very rare that the Internal Revenue Service contests
the proportion of salary to dividend actually taken. However, the agency strongly
urges that the business owner not be abusive of this advantage. Income tax returns
with excessive dividends-to-salary ratios can raise a red flag and subject you
to an audit. But your inquiry has
already raised a red flag with me. Obviously, you expect to generate sufficient
profits to warrant compensation, and you have not yet issued yourself a salary
or wage check. When do you plan to do so? Tax
responsibilities
When that check is issued, remember
that your compensation from wages or salary is subject to payroll tax deductions
for Social Security and Medicare. Because you are the owner, your company must
also cover the employer and employee match on those deductions. Given the fact
the company was started this year, you have until the April 15 filing deadline
to report and pay those deductions. Jeff,
I think you need to begin learning many important basics about legal business
structures and the tax implications associated with them. Here are some Web pages
to begin your orientation: There
is more to be learned, but this information should provide you an excellent foundation. I
wish you well in the tax season and with the future of your company. | 
