Comment by dave_sullivan | Hacker News Reader

Comment by dave_sullivan | Hacker News Reader

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Alright, I'll bite.

You're right. But you're not going to avoid the stock market (where you might get paid in dividends) because you want to avoid double taxation. However, when forming a company for the first time, you'll hear double taxation cited as a reason you might not want to form a corporation. This is stupid because you're not going to pay yourself in dividends. Of course there are many reasons you might choose one business form over another -- I'm just saying that double taxation really isn't one of them.

Likewise, if you are deciding between digital ocean and AWS -- there are many reasons why you might want to go with one over the other. One of the reasons is not because you lose all your data when you restart a machine on AWS. I mean, look, I'm considering giving DO a shot for various reasons, but AWS losing my data because of some oversight in their service that DO has fundamentally engineered around isn't one of them.

In both cases, I'm not saying one is better than the other -- all i'm saying is some distinctions are subtly stupid to the point of being manipulative. As in FUD. That's my full thought process on this matter, I don't think I've got anything past that, haha

If you run a company and are paying yourself excess profits as salaries or bonuses, you are paying payroll taxes on that money. If you have a C corp you are paying taxes on that money as dividends. If you have a pass through entity of some sort (S corp, LLC, etc) you can avoid paying payroll taxes on distributions and also avoid double taxation.

Unless I'm missing something with AWS, what oversight in their system causes you to lose data? They are quite upfront and transparent that your data does not stick around unless you use EBS.

The IRS has been cracking down on people who use that loophole.... The doctor that has $50k in FICA earning and $200k in partnership distributions. Using that kind of loophole is playing with fire. You might get away with it for life, or might get stuck with a $250k tax bill at any time.

Isn't that only the case if you are paying yourself mainly via distributions? If you are paying yourself a market rate salary and taking any profits at the end of a good year via distributions would they frown on that? Assuming you have shareholders who don't work in the business (say family) I don't see how else you could distribute proceeds back to them.

The self-employment tax covers K-1 distributions, etc. If you're inactive (not actually working for the pass-through entity, only receiving profit distributions) your taxes are additionally higher on those distributions.

In summary: typical pass-through entity distributions are typically taxed as self-employment income and subject to the SET which attempts to recover the missing employer's half of tax payments. You cannot avoid all employer's half of taxes by taking them as distributions, and whomever told you that has misled you.

Now, what you might actually be thinking here, and would be correct, is that for those who earn less than a certain income (which would place them in the top tax bracket), the effect of applying all of those payments as self-employment income generally results in a lower tax rate than the corporate tax rate, and allows for deductions that companies may not have available to them.

Interesting, that's contrary to what I've heard from multiple sources (and pretty much all literature about the subject that I can find) about S-Corp distributions (again assuming you are being paid a market salary that you would hire someone at to perform similar tasks).

"If you have a pass through entity of some sort (S corp, LLC, etc) you can avoid paying payroll taxes on distributions and also avoid double taxation."

What you're talking about does not apply to LLCs, it is a special situation only related to S-Corps. Generally speaking, pass-throughs such as LLCs all distributions are taxed as self-employment wages, except under certain conditions.

Hmm.. question for u. Say I start a corporation, with just me and another partner, and I need to pay myself... So the revenue earned by the company that's paid to me. that's taxed once by the company. And then again by me as salary. No? Isn't that how it works?

No, that is not how it works. Your salary is an expense for the company, paid before any corporate tax is paid, and thus reduces corporate tax.

A company that has $10MM in revenue, and $10MM in salary expense will pay zero corporate income tax.

A company paying its owner $10mm in salary cannot deduct all $10 million. It could probably get away with paying a six-figure salary (fully deductible), but the rest would be re-characterized as a dividend and the underlying "salary" expense would not be deductible. At the numbers we're talking about in this hypothetical, the corporation would be treated as severely underreporting its tax liability--meaning the highest penalty rates, back interest, and possibly including jail time.

His point is: salaries are an expense.

Yes and no. What the other comments are ignoring is that the deductibility of salary paid to owners is capped, precisely to avoid the shenanigans they're trying to achieve (i.e., avoiding double taxation using the corporate form).

Up to a limit, your salary as owner is deductible to the corporation. Generally, the "safe" limit is usually the current SSI maximum wage. Beyond that, the IRS is very likely to re-characterize wages paid to owners as dividends. While this actually results in a lower (direct) tax to the owner, it usually results in higher taxes to the corporation, plus penalties and back interest.

Note that this is generally true for LLCs, S-Corps, and C-Corps, though the precise rules differ based on the type of entity. You'll definitely want to talk to a lawyer or accountant.

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