Should You Take a Salary From Your Business Entity?

In this episode of Coffee with Carl, attorney Carl Zoellner explains the benefits of taking out a salary from your business entity.

 

So, you’re ready to get paid out of that entity…now what?  

Is it even appropriate to take out a salary?

The first thing I look at with all my clients looking to do this, is the reason behind it. 

If you’ve got a C corporation, before we’ve started paying salary, have we covered all of our reimbursements? 

Oftentimes, that’s the best way to get money out of your corporation tax-free. Have you considered doing a dividend payment? This is taxed at long-term capital gains rates rather than short term, and it doesn’t come along with a self-employment tax. 

Usually, when my clients start looking to pay a salary, there’s a reason. 

Why Take a Salary From Your Entity Structure?  

The two most popular reasons, especially when we start looking at the C corporation as an entity, tend to be, wanting to contribute to a retirement plan or maximize contributions to a retirement plan. Or, you want to look better to a lender, so you need to show more W-2 income. 

Both of those are completely reasonable. Outside of that, if you’re just looking to get money from your C corporation or an LLC taxed as a C corporation, I would look at how to get it out at a lower tax rate if we’re just looking to cover living expenses or just get some more cash in your pocket. 

If we look at an S corporation, you’re required to pay a reasonable salary, and the rest you can take out as a distribution. A huge benefit with distributions is they don’t come along with self-employment tax. However, the salary from that S corporation would come with a self-employment tax. 

S corporations tend to be a better fit for those folks who tend to withdraw all of the money from the business and are making more than they can reimburse on an annual basis. 

Now, the last one we tend to see is disregarded entities or partnerships. How do you pull money out of your disregarded entities into your partnership? It sounds silly, but this one is straight forward. You just move money from one account to another. 

Through a disregarded entity or a partnership, the income and loss will fall directly onto your personal tax return. So whether that’s through the medium of a K-1 in a partnership or if it’s just falling directly onto your 1040, your individual return, ultimately you’re the one still paying tax on it. 

Distributions are often an easier way to pull money out of a business. However, it doesn’t necessarily mean it’s always the most tax advantageous way. 

It’s important to know that there are lots of different ways to pull money out of your businesses, and the best for you will often depend on your individual scenario. The snap reaction to the C corporation is always, “Oh my goodness, but what about double taxation!?” 

C corporations are great, and most times, you can choose how you want to be taxed. 

If we’re looking at salary, it should be an active business. Normally, I’m looking at corporate taxation from that perspective. As always, “we want you to take advantage of our free content that’s out there, so please join us.”

If you have any interest in anything , check out Toby’s Tax Tuesday. Toby’s one of the founding partners of the firm and a tax specialist when it comes to leveraging everything you can to make the most money. 

My colleague, Toni Covey, hosts Toni Talks, which you can also watch on this channel and catch up. It’s also tax based, plus we offer many free education opportunities. Choose from any of our online niche series and find a lot of useful content for your scenario. 

The Takeaway

Until next time, please continue taking advantage of all of our free content out there. I love seeing our clients at our webinar classes or chatting with us online. On the other side of that, if you’re not yet a client, I would encourage you to have your FREE Consultation, and we look forward to working with you. Until next time, thanks for joining me for this episode of Coffee with Carl.

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