IRS Nails CPA For Copying Steve Jobs, Google Execs 509
theodp writes "It seems $1 salaries are only for super-wealthy tech execs. The WSJ reports that CPA David Watson incurred the wrath of the IRS by only paying himself $24,000 a year and declaring the rest of his take profit. It's a common tax-cutting maneuver that most computer consultants working through an S Corporation have probably considered. Unlike profit distributions, all salary is subject to a 2.9% Medicare tax and the first $106,800 is subject to a 12.4% Social Security tax (FICA). By reducing his salary, Watson didn't save any income taxes on the $379k in profit distributions he received in 2002 and 2003, but he did save nearly $20,000 in payroll taxes for the two years, the IRS argued, pegging Watson's true pay at $91,044 for each year. Judge Robert W. Pratt agreed that Watson's salary was too low, ruling that the CPA owed the extra tax plus interest and penalties. So why, you ask, don't members of the much-ballyhooed $1 Executive club like Steve Jobs, Larry Ellison, Sergey Brin, Larry Page, and Eric Schmidt get in hot water for their low-ball salaries? After all, how inequitable would it be if billionaires working full-time didn't have to kick in more than 15 cents into the Medicare and Social Security kitty? Sorry kids, the rich are different, and the New Global Elite have much better tax advisors than you!"
This is Why (Score:5, Informative)
It's because this guy paid himself the same amount, he just funneled a lot of it through his corporation, of which he owned the dominant share (if he was going through an S-Corp, he only needs at least one other shareholder, I believe). S-Corps don't pay corporate taxes either. Google, Apple, et al are public corporations which pay corporate taxes (though not much, usually, by taking advantage of various loopholes). Most of them don't even pay a dividend, so even if Steve Jobs does have a significant number of Apple shares, he's not getting any direct payment of the company profits.
Why Jobs and Ellison don't get in trouble (Score:5, Informative)
Re:This is Why (Score:5, Informative)
You can have an S-Corp with only one shareholder (at least here in WI and most other states I know of). That's how I do my consulting. It involves more paperwork that being a sole proprietor, but their are liability and tax advantages to having a real corp over going sole proprietor. An LLC is also a good option; it lacks some of the advantages of an S-Corp but involves less paperwork.
Re:Why Jobs and Ellison don't get in trouble (Score:5, Informative)
No, the difference is that the guy in this case took a low salary, and took the rest as a profit distribution. In the case of Jobs et al., they take a salary of $1 and take the rest as Stock. Its a whole different accounting ball game.
Re:Not so Easy (Score:5, Informative)
Because most companies don't give straight shares, they give options.
If the stock price goes up, the owner of those options can exercise them, but actually has to pay for the underlying stock. If the stock price goes down, their owner lets them expire, giving them zero value.
So rather than "free money under a different name", stock options as a form of executive compensation more closely resemble a one-sided bet... If he wins, he wins. If he loses, he doesn't really lose anything.
Tying that all back to the situation in TFA, however, it gets a whole lot shadier when you have a one-person corporation - The owner of the company usually already owns 100% of the stock so can't pay himself with more of it (not can he issue options to himself on it).
More practically, he should have done what most sole proprietorships do to hide money - Pay himself as much as he really needs to live, and use the remaining profits on "capital improvements" that he just happens to personally benefit from, ("company" car, new computer(s), perhaps an "office" (aka "place to spend the night for free") in a remote location that he often visits, if that applies). That way, he also gets the perk of claiming depreciation on those assets over time, which we mere humans don't get to do.
Re:Wow! Delusional much? (Score:3, Informative)
This skill is a little less amazing than you say. The congress ( both houses ) was controlled by Democrats who did not want to go along. The compromise was the expiration. Bush would have much preferred permanence. You are saying that those in control of writing the actual bills were willing to take a chance of wearing all of the egg. If this is true, then the Dems of the time were just plain stupid, and Bush should get no credit for picking on people dumber than him.
No, when the Bush tax cuts were passed both houses of congress were controlled by the Republicans e.g. 2001 & 2003 (look it up). The tax cuts in the senate had to be passed by reconciliation, because the republicans didn't have the 60 votes necessary to end the filibuster hence the 10 year limit on the tax cuts.
Re:Why Jobs and Ellison don't get in trouble (Score:5, Informative)
The "question" is easily answered (Score:4, Informative)
Jobs et al do not get in trouble with the IRS because they do not, after having paid themselves $1 salaries, turn around and distribute their companies' entire profits to themselves at the end of the year. Profits are retained by the corp and taxed at a pretty high rate, or distributed to shareholders and taxed. Whereas with an S corp, all profits flow through to the shareholders, and the corp itself pays no taxes.
And yes, they pay taxes on their stock options. In fact, gains from stock options at the moment they're exercised are treated as ordinary income and subject to normal income tax rates + FICA + Medicare. I don't know about the treatment of stock grants...
Re:The Joys of employeehood.... (Score:3, Informative)
Re:Wow! Delusional much? (Score:5, Informative)
that's just Buffet being populist and trying to be liked by the masses, when in reality he is throwing a bunch of people under the bus where they clearly do not belong.
What Buffet is comparing is apples and pine-cones. He is talking about the DIVIDENDS that he is deriving from his investments, so from dividends you pay a lower percentage of income taxes than you would from just a salary, as his secretary does.
What Buffet is NOT telling you, is that the dividends are ALREADY TAXED FOR INCOME.
The dividends end up taxed twice by the government! So just because Buffet is paying less in number of percents from his dividends than his secretary in number of percents from her income, does not mean that the gov't is actually getting less from the money that those dividends are taken from, because the first thing that happens before dividends are paid is this: liabilities and taxes are paid and only then dividends are paid, and then there is a tax on them.
So please, give me a break.
Buffet has been on this for a while, aiming at people who do not understand the issue, being populist, while from the other side of his mouth he is praising the gov't for helping his company to survive by massive bailouts.
That's right, the fucking 'genius' of a businessman he is, isn't he? Dipping the hand into the pocket of uncle Sam, while yelling on TV how sorry he is for getting those miserly dividends.
The REAL story with Buffet is that his company was bailed out with billions upon billions of inflated government printed dollars.
Re:Wow! Delusional much? (Score:5, Informative)
Granted this is for assets above 1 million+, but in this day and age there are a LOT of family's which have these kind of assets, and it would cut them in half after losing a family member.
That's not how inheritance tax works! It's progressive, just like income tax. From 1977-2007 the lowest rate was 18%. The brackets for highest rates were several times the low-end cutoff. So for example in 2002, the last year the highest rate was 50%, the highest bracket was $3 million! Very, very few individuals have $3 million in assets that pass through probate. People who are that wealthy use trusts, inter vivos transfers, and various other mechanisms to avoid inheritance tax.
Inheritance taxes are not a new or weird idea. Inheritance taxes in the United States date back to the Civil War era, and historically the highest rate has often been higher than 50%. From 1934 - 2001 the highest rate varied from 55% to 77%. On the other hand, the lowest rate has always been much lower than 50%. From 1916 - 2007 the lowest rate varied from 1% to 18%, with 18% being the rate from 1977-2007.
Finally, you should know that there are a large number of deductions to the estate: debts, administration fees, funeral costs, state inheritance taxes, charitable bequests, and (most importantly) all bequests to a spouse. So if you're survived by a spouse and give most or all of the estate to the spouse, then tada! no inheritance tax.
Re:The Joys of employeehood.... (Score:5, Informative)
The obvious difference between this guy and the $1 club is the $1 club don't take the profits from the company. That was his mistake.
The $1 club gets paid in stock options, which have their own tax structure, and the occasional comped service. While it is a good way to avoid taxes, they are usually still taking a big hit in the pocket book for doing so. It can actually be pretty good for the company, too. In the case of Steve Jobs and Google's top three, their net worth is directly tied to how well the company performs, so if they are at all concerned about money they are going to try to make the company as profitable as possible to boost their stock values.
The Google CEOs are in the realm that a few million a year in salary is quite literally chump change. Taking the hit in salary to boost morale and their public image can mean an extra few million in stock values every year anyway. It's probably well worth it.
I'm really not sure how a non-public S-corp could pull off a similar feat. The best option is probably to have the S-corp comp everything you can think of, and once you've run out of things to comp figure out your salary from that. Taking leftover profits well in excess of your salary is asking for trouble.
Re:The Joys of employeehood.... (Score:5, Informative)
This is not legal advice, and I'm not your lawyer.
Generally, the tax laws are such that you have to pay yourself a "fair salary" if you're the sole shareholder of an S-corp that is basically just a shell for yourself.
Now, what is a "fair salary"? The answer is "who the hell knows," but a good rule of thumb is "a typical, reasonable salary in the industry." I was once at a meeting with a financial planner, and he said a 50-50 split seems to be fair, but I'm not so sure about that.
My guess is that since you have a fixed salary every year, you're probably not screwed, unless your "fixed salary" is $25K/yr in an industry where the average consultant at your level pulls $90K/yr.
Re:Off Topic Rant (Score:5, Informative)
As an ACCA [wikipedia.org] student from Pakistan, I will try to shed some light. (Please correct me if I am wrong)
The major difference between American style CPA and English style CA is their approach to qualification. CPA starts with an "academic"(keyword here) four year Bachelors, plus some extra "accountancy" credit hours, though I can't find any description whether these course have a pre-defined subject and syllabus or not.
The you take a one-day, four-subject "professional" mammoth state exam, and combined with some mandatory "professional" experience you become a CPA. Incidentally, you are *not* bound to actually be a member of AICPA to practice as a CPA.
CA is different. You start early on, often after high school level, and you start your "professional" education, doing a strange combination of professional internship at an audit firm
and taking multiple level course (these can go to 20 paper, and focus in depth management, finance, tax and law).
Passing these subjects is hard, since these are one-go end of term exams, not college type where midterms and assignments count.
On top of that, often bodies have weird rules (you must pass all the subject in one module at a go, or else you fail all even if you gained an individual pass in some of them, or else you have only a few number of attempt, or limited amount of time, or some other catch.)
Examinations are very strict, partly due to high professional requirements, but mostly to keep supply low to avoid devaluing the market.
But even after that, you must continue to be member of the body, and pay their annual subscription (and are bound to their laws) or else you can't practice.
To wind up, I would say that CPA is indeed "easier" than CA. Firstly, you start with a proper Bachelor's degree, so you are qualified for the market in one way, academically if not professionally. In CA, you often start early, and unless you complete it all, you are really stuck (part qualified also manage get jobs, but still it's not the real deal you spent all that money and time for)
Secondly, the CPA system is easy. Oh sure, the exam themselves are tough, but there is only four of them, and there is no crazy pass-all-four-in-one-go scheme. For people who have to endure 20 of them, four would be a blessing.
Thirdly, CPA is not standardised as such. Except for the four professional papers at the end by the Uniform CPA board, the rest is based on various academic courses taken on your bachelors examination, with varied syllabuses and requirements. You might enrol in a college with a slant towards one finance rather than management, or maybe stress on one theory over another. In CA, you pass through a standardized syllabus through and through, so all candidates have a uniform base.
CA is a very prestigious "professional" qualification, and with strong traditions and strict control on ethics. However, you do get rather single-tracked. CPA feels like a clumsy "professional" topping on an "academic" cake, but going to college does give you a very good overall base.
Re:Wow! Delusional much? (Score:5, Informative)
Restricting this kind of discussion to income tax is misleading to the point of being deceptive. Most people pay more in payroll taxes than they pay in income taxes. That 47% of households who paid no income tax paid plenty in payroll taxes.