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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!"
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IRS Nails CPA For Copying Steve Jobs, Google Execs

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  • by rajeevrk ( 1278022 ) on Sunday January 23, 2011 @06:17AM (#34971634) Homepage
    Remember all, when you are an employee, the government always has the first share of your pay-pie.... if the cpa was smart, he'd have set up a proper LLC shell, and worked through it. I'm sure he has the skills to do so. and the appeals verdict on this should be interesting...... Also, yaaahooo, my first first-post!!!
    • by williamhb ( 758070 ) on Sunday January 23, 2011 @06:21AM (#34971644) Journal

      Also, yaaahooo, my first first-post!!!

      Ah, if someone paid me a dollar for every time I got a first post... I'd be an executive!

    • Off Topic Rant (Score:5, Insightful)

      by definate ( 876684 ) on Sunday January 23, 2011 @06:30AM (#34971672)

      if the cpa was smart

      CPA's [] aren't very smart, that's what CA's [] are for.

      But in all seriousness, CPA is a really easy designation to get. I've got friends who have done both (due to working in firms who were CPA, and CA only), and the CPA is a piece of cake compared to the CA. So, the CPA is far less a symbol of being good at accounting than the CA is. Though I hear it's a little different in the US.

      Anyone care to shed some light? Particularly if you're originally from a commonwealth country.

      • Re:Off Topic Rant (Score:5, Insightful)

        by Dcnjoe60 ( 682885 ) on Sunday January 23, 2011 @08:15AM (#34971958)

        CPA's [] aren't very smart, that's what CA's [] are for.

        But in all seriousness, CPA is a really easy designation to get. I've got friends who have done both (due to working in firms who were CPA, and CA only), and the CPA is a piece of cake compared to the CA. So, the CPA is far less a symbol of being good at accounting than the CA is. Though I hear it's a little different in the US.

        Anyone care to shed some light? Particularly if you're originally from a commonwealth country.

        Ummm, since this is a US tax case, the following applies: In the United States, CPAs are five year programs, then passing the unified CPA exam, then a minimum of 2 years experience. That's the equivalent of a Master Degree in Accounting, so unless a CA is the equivalent of a CPA, then I doubt that CPAs aren't very smart and CAs are more technical.

        • A CA is a CPA, we have both institutions over here. They both operate and certify a level of competency, but the CA is really hard, and the CPA is quite easy in comparison.

          Both of them have "similar" requirements, it just seems as if the CPA is less stringent testing them. What you've said above is about the same here.

          Though they require experience before hand, you need to be working in accounting at a certified firm, then it's a 4 year program (or longer, depending on you), then you need to maintain your c

      • Look at paragraph 4 of your second citation
        "In the United States the approximate equivalent [of the Chartered Accountant] is the certified public accountant."

        In other words, a CA is someone who qualified as an accountant in Scotland and is likely familiar with British tax laws. A CPA is someone who qualified in the US and is likely to be more familiar with American tax laws.

        Yes, the British tax code is the most complex in the world, so maybe you do need to be smarter to understand it, but that doesn't mean

      • Re:Off Topic Rant (Score:5, Informative)

        by ryzvonusef ( 1151717 ) on Sunday January 23, 2011 @01:59PM (#34974378) Journal

        As an ACCA [] 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.

    • by Izaak ( 31329 ) on Sunday January 23, 2011 @07:00AM (#34971760) Homepage Journal

      As I read it, he had an S-Corp, not an LLC, but paid himself a salary just as you suggest. The problem is that the IRS claims he paid himself too little (which he could have also done with an LLC). The reason he did this was to reduce his payroll tax contributions. This can also reduce your eventual social security benefits, but as a CPA he probably figured he could do better investing the money. As an independent consultant this is the same situation I am in. I take a fixed, modest salary and take any additional income as just profits from the corporation. In year where I book a lot of hours, my income from profit can be more than my salary... which it looks like according to this article could put me in the cross-hairs of the IRS. I guess its time to give myself a raise. :-/

      • This can also reduce your eventual social security benefits

        Social security benefits are capped at relatively low levels, he wouldn't get but a small part of those $379k/year after he retired.

        According to this link [] he would get about $11k if he paid taxes on $24k/year and about $26k if he paid taxes on $379k.

      • by Bigjeff5 ( 1143585 ) on Sunday January 23, 2011 @01:01PM (#34973844)

        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.

      • by TheoMurpse ( 729043 ) on Sunday January 23, 2011 @01:13PM (#34973986) Homepage

        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: (Score:3, Interesting)

        by swrider ( 854292 )
        In 1994, I started a local ISP as an S-Corp. I had no other employees and ALL of the revenue went into buying more modems, phone lines, servers, etc. As I came down to the end of the first year, I was not certain what my profit would be, if there would even be one. I did not pay myself a salary because there was no cash in the bank to do so. All of my revenue was going to keep the business going.

        Four years later, the IRS came back and imputed a salary of $24k for me so that they could collect the Soc
    • by Sique ( 173459 ) on Sunday January 23, 2011 @08:19AM (#34971976) Homepage

      Because the government created a legal framework and will protect your right to get a fair wage for your work, it will also take some of your wage as a compensation for its work.

      Feel free to abolish all government and then try make a decent living from being employed!

    • Setting up an LLC wouldn't have changed things (and might have made them worse). By default, distributions from an LLC to members who play an active role in the LLC's operations are also subject to FICA/FUTA withholdings (limited members who don't play any role in operations can avoid this outcome). An LLC can elect to be treated like an S corp for tax purposes but why would you want to go through that trouble when you can just be an S corp in the first place?

      And as for Steve Jobs, has anyone seen his per

  • Karma (Score:2, Interesting)

    by symes ( 835608 )
    At the end of the day the super wealthy can only protect their position by sharing their wealth or suppressing dissent. In an age when everyone on the wage spectrum can dial up stories on how much the super-wealthy earn and how much they give back dissent is likely to grow in times of hardship. While some might argue we need these innovators, innovation is not strictly related to wealth but is very much reliant on the resources and infrastructure funded by tax payers. It's not therefore how good their tax a
    • by SmallFurryCreature ( 593017 ) on Sunday January 23, 2011 @06:47AM (#34971730) Journal

      Just what the hell did you smoke that created this fairy land?

      Tunesia recently revolted after DECADES of abuse by the superrich where they did no longer bother with tax evasion but just stole gold and killed those that protested. Oh and don't forget decades of poverty and a hopeless future for the majority.

      If it takes that much negative karma, Bill Gates and Steve Jobs and the likes have NOTHING to worry about. The average voter ain't even smart enough to realize that their tax avoidance schemes ultimately cause the non-super rich to pay higher taxes. They just blame Obama and vote in the tea-party. Extended tax-cuts for everyone who has more then a billion folks!

      Bread and circusses. The only risk the super-rich face is if the American Dream dies, and that dream is not about actually being able to afford a car, a house and a huge tv, but about being able to work very very hard to get a loan that always puts you one pay check away from loosing it all. Keeps the folks on their toes, unwilling to do anything to risk upsetting the status quo lest they miss a credit card payment and loose it all.

      Why do you think ALL the elite were HORRIFIED over the housing crisis? Because poor people lost their home? Yeah right. No, because poor people found out that they aren't all that tied down to their debt. Default and walk away and start over new, maybe somewhere different with a different kind of politician. Don't let the poor money to get themselves in debt and they just might not be in debt anymore and then how do you control them?

      But that is not the worry of the super-rich. They are a few hours away from leaving the country anyway. It is the layer below that should be worried but the situation in the west is still far to tempting for the ones to get screwed to ask themselves, is it worth getting it up the ass so hard for the tiniest impossible change to one day strike it rich and screw every one else? 99% of voters in the US? Yes, yes it is.

      • by SuricouRaven ( 1897204 ) on Sunday January 23, 2011 @07:15AM (#34971796)
        I think most people regard tax as something that needs to be paid... by other people.

        I must admire Bush's (or his Republican advisors) political skill in one way. Any politician can pass massive tax cuts to win popularity, that's obvious. But he went one step further. He passed the tax cuts with an expiary date set for the next term, knowing that there was a more than fifty-fifty chance that it would be a democrat who would be in office and thus have to either take the blame when taxes went up, or be forced to extend cuts that were obviously unsustainable.
        • by Spad ( 470073 )

          No, the true skill was in convincing people that the expiry of the tax cuts would have a substantial impact on their finances. Most (Read 95% of) Americans would have paid little, if any, extra taxes if the cuts had expired; all the $1800/year figures that were floating around were mean averages that were massively distorted by including the top 5% of earners in the calculations and then pretending that said "averages" were representative for everyone in the country.

      • What I don't understand is the outrage over NOT paying into two government schemes (medicare and social security) that this person is also NOT going to depend upon payments from, even though he was continuing to pay the OTHER taxes.

        Corporate income tax rate is 15% across the board, with a lot fewer deductions than personal taxes. And, if the business is considered a "personal services" corporation, even more rules apply. When I still had my own companies, we took what we could in salaries and bonuses, rath

      • Re: (Score:3, Insightful)

        by protektor ( 63514 )

        You might actually want to check and see who is actually sending in more money to the government. I am betting you think it is the poor or middle class. You would be wrong according to the reported government numbers. The bottom 50% earners are only paying 2.7% of the total income tax received. This is actual money sent in to the government. Where is the myth that the poor are paying more than others coming from?

        If the bottom 50% of the earners are only paying 2.7% of the income tax that ends up to be even

        • by sribe ( 304414 )

          I don't pay much attention to the "middle class is disappearing" bs because I'm middle class as are most of my friends and we're not really disappearing ;-)

          That said, I saw an analysis of one of the sources of these claims, and guess what? The dividing line between poor and middle class had been inflation-adjusted every year, while the dividing line between middle class and rich had been left at the same dollars/year amount for decades. Further, the same people were moaning about the persistence of poverty,

          • the dividing line between middle class and rich had been left at the same dollars/year amount for decades [. . .] Same percentage of poor, lower percentage of middle class? [. . .] this is a huge problem that must be corrected?

            Haven't you just explained it yourself? People, on average, WILL make more money in the future than they make now in absolute terms. The question is whether that remains true in relative terms. Making a million dollars a week matters very little if a loaf of bread costs two million

        • Your numerical analysis fails to consider the total tax burden. By focusing solely on income tax, it creates a distorted picture of how much tax is really being paid, and by whom.

          The federal government treats the revenue from social security precisely the same as revenue from income tax. It goes into a general fund, and is used for general spending. There's a nebulous IOU out there, for paying future benefits, but social security money is just spent in the general fund.

          If you were going to introduce a new t

        • by Grond ( 15515 ) on Sunday January 23, 2011 @12:49PM (#34973728) Homepage

          So if you added corporate taxes to the top 5% then you are talking 71.7% of revenues in 2009. It would 67.7% of revenues in 2010. So it would appear to me that the "rich" in this country are paying significantly more than half of the cash needed/used for the government to run.

          Okay, but the rich happen to control far more than half of the country's wealth and earn more than half of the income in the country. Specifically, in 2006, the top 20% of earners made 61.4% of the income, and in 2007 the top 20% controlled 85.1% of the wealth. Source []. So, the tax burden placed on the rich is completely fair. If anything they should be taxed more at the high end.

        • by rubycodez ( 864176 ) on Sunday January 23, 2011 @01:44PM (#34974252)
          no, I thought the nation is falling into poverty and the middle class is disappearing, while oligarchs control the government and most of the wealth, and get bailouts from the government when their bad business models fail. Please give me statistics to make me feel wrong about this. Oh, and make me feel good about the "Dutch Sandwich" whereby companies like google only have to pay 2.5% in income tax while enjoying all the benefits of being a U.S company. Give me some extra loving shilling for the system, I've been having thought-crimes lately about it. thanks!
        • by Ian Lance Taylor ( 18693 ) <> on Sunday January 23, 2011 @02:35PM (#34974662) Homepage

          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.

        • by Bob9113 ( 14996 )

          Top 1% Pay 38% of all income tax
          Top 5% Pay 59% of all income tax
          Top 10% Pay 70% of all income tax
          Bottom 50% Pay 2.7% of all income tax
          47% of American Households didn't pay any income tax for 2009.

          The way you bundle the stats is the common story, but results in misunderstanding the case. The bottom 50% earns less than $30,000. Those are the floor-sweepers and part-timers. Including their tax stats with people earning, for example, $50k - $100k makes the middle class look like shirkers (on average).

          Here's som

        • by Xyrus ( 755017 )

          The top 20% also controls almost all the wealth in the country. The are only taxed on a small portion of that. They also may pay the most in dollar amounts, but that 38% number doesn't mean they are paying 38% of their income (they aren't). Through various loopholes, tricks, and shelters, the effective tax rate on the upper 1% is more like 15-20%.

          Percentages also don't show the effects of tax burden on the various classes. A 1% tax increase hits the middle class harder than it hits the rich. Plus, given our

        • by Junta ( 36770 ) on Sunday January 23, 2011 @03:30PM (#34975116)

          The problems I have are:

          You didn't provide the data on wealth distribution to compare and contrast. The tax contribution ratio is meaningless without knowing how the overall wealth got distributed. If hypothetically top 10% control 90% of the wealth, then 70% wouldn't be rationally a fair share.

          The other issue is this is measuring the 'fairness' of being wealthy solely on tax contribution. The major problem is the people on top get to carve the pie and hand it out, opting to hand themselves a disproportionately large share. This is the *key* issue of those disgruntled with the situation. Mumblings about sketchy accounting and tax loopholes are there, but the real outrage comes when you see execs giving themselves huge bonuses, *especially* when that happens directly because they laid off people. Sometimes this manifests as people wanting to balance this by 'unfairly' taxing the wealthy, which is their only practical strategy to correct the natural unfair tendency for wealth to gather at the top in purely capitalist systems. One could say in theory consumers could control this through their purchasing decisions, but in practice people are either unaware or unwilling to enact meaningful boycotts, the former because its nearly impossible to know what products fuel the imbalance more than others and the latter because even when armed with this knowledge, they know their small contribution is nothing by itself and larger short-term needs drive their purchasing decisions instead. I personally know executives making 7 figures. They are more lucky than skilled, and simply aren't worth their pay. I also know some presidents that keep their *total compensation* capped in the 200-300k range and make sure the rest goes into their employees. 200k-300k is still pretty damn wealthy, and you have a much healthier company if you direct resources it earns into enriching the company instead of leeching.

        • by sjames ( 1099 ) on Sunday January 23, 2011 @03:47PM (#34975232) Homepage Journal

          Your confusion is that you are mistaking percentages by the person and percentages by the income. Let me simplify it down for you.

          Take 10 people. One of them makes 10 billion dollars a year. The other 9 each make $20,000. The top 10% guy complains that he pays a full 70% of all taxes paid and life is just so very unfair (note that he also makes well over 99% of the income). Of course the only thing that keeps the other 9 guys from leveling the playing field (and income levels) is the law enforcement and court systems the tax money puts in place.

          If any of those top 1% are that upset about their taxes, I'll trade places with them. Any takers? <crickets chirping>

    • Re:Karma (Score:4, Funny)

      by FudRucker ( 866063 ) on Sunday January 23, 2011 @07:13AM (#34971792)
      "Religion is what keeps the poor from murdering the rich." --Napoleon Bonaparte

      the world needs more atheists...
      • Re:Karma (Score:4, Insightful)

        by roman_mir ( 125474 ) on Sunday January 23, 2011 @09:07AM (#34972166) Homepage Journal

        don't forget, you ARE rich to somebody, while somebody else is rich to you.

        As an atheist, I am not about to go on a killing spree, I don't care that there are people who are richer, I WANT there to be rich people rather than poor people.

        I want people to compete, to create better products/services and if they become rich in the process, I am all for it, as long as I get the spoils of that competition through lower prices/higher quality/more new interesting stuff - that's economic growth.

        I don't even need a lot of money, I just need real competition in the market. Real competition, without government intervention. Why is that? Because I want to see companies compete in cut throat environment, where things are deflating in price.

        I want prices to fall, I want deflation. I want deflation. Deflation. Deflation of money supply - that's what I want. I want money to become more and more expensive and more and more scarce.

        Why is that? Because prices for everything go down as money become more expensive. I don't want inflation. Will the labor prices go down as well? Of-course! But in real competitive market the number of competing entities is so high, that whatever money I have will buy more and more every day.

        Those were the actual realities of the USA in 19 century, even though even in those times the US gov't was doing something terrible - helping some people with their monopolies. The robber barons, the tycoons, whatever, those were gov't created. But the prices were falling. New products were created. New industries were created. Entire new job segments were created. Nobody had to work in the field farming 15 hours a day just to feed themselves. More leisure time was created.


        Do you know what is good? It's when you do not have to work at all or work very very little to feed yourself, so you'd have much more leisure time.
        Do you know how that can be achieved?
        Through massive automation of production, through new efficiencies and competition.

        We see examples of this: computers, TVs, cars, any technologies, some forms of medical attention, and many more things tend towards that because there is real competition there. Who could afford THEIR OWN COMPUTER 50 years ago? Who does not have a computer in their phone or PDA or TV today?

        Was this done by poor people? Was this done by governments and monopolies? Or was this done by people who became also insanely rich in the process?

        So why would we want to punish success? What we need is to punish FAILURE. And government is not punishing failure, it's punishing success with taxes and it's rewarding failure with money and positions of power.

        All of those banks that were gov't created monopolies, that enjoyed gov't FDIC insurance, that had all that cheap money from gov't, that had all those regulations destroying their competition by gov't, all those banks failed. They are failures, yet they are rewarded. The GE CEO now has a high power position in the US government. WHY? Under his watch the valuation of GE fell by over 50%, maybe more, that's insane to reward that!

        But that's the way it is - the gov't creates inequality by destroying competitive environment, it promotes FAILURE it denounces success and it's causing the society to be poorer and poorer all the time, but hey, at least we can blame the rich for this.

  • This is Why (Score:5, Informative)

    by matunos ( 1587263 ) on Sunday January 23, 2011 @06:35AM (#34971694)

    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.

    • Re:This is Why (Score:5, Informative)

      by Izaak ( 31329 ) on Sunday January 23, 2011 @07:09AM (#34971780) Homepage Journal

      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.

    • Hence the need for fundamental tax reform. Alas, they are likely to make it MORE complicated than it is now as it's in the governments best interest for the majority of us not to be able to decipher just how much we're being taxed.
  • by jonatha ( 204526 ) on Sunday January 23, 2011 @06:44AM (#34971720)
    The distinction between Mr. Watson and Mssrs. Jobs, Ellison, Brin, et al, is that the salaries of the latter are set by independent boards of directors of public companies. Mr. Watson set his own salary, which the court found was not commensurate with the market rate for that sort of work.
    • by mallydobb ( 1785726 ) on Sunday January 23, 2011 @06:50AM (#34971736) Homepage

      and managing a multi-billion tech company is only worth being paid $1? While the salaries of your examples may be set by a board their official pay is not accurately describing the value of what they bring to the company. Sorry, can't agree w you there.

      • by jonatha ( 204526 )
        Oh, they get paid a lot more than $1. But it's in forms that isn't subject to FICA (e.g., incentive stock options).
        • by vux984 ( 928602 )

          Right... but that is precisely the same sort thing this CPA tried to do from the look of things... except he didn't get away with it...

        • by TheRaven64 ( 641858 ) on Sunday January 23, 2011 @10:34AM (#34972762) Journal
          It also includes use of corporate equipment. For example, Steve Jobs was permitted sole use of an Apple-owned jet. You typically have to declare use of corporate equipment for personal use as income, but this is quite flexible. For example, if he used it to fly to Japan for a holiday, this would be personal use. If he used it to fly to Japan to inspect the Tokyo Apple Store for ten minutes and then took a holiday in Japan while he was there, then it probably wouldn't. Even when it does, typically the amount he'd have to declare is the operational cost, rather than the amount it would have cost to own and operate his own jet or to hire one.
      • by Monchanger ( 637670 ) on Sunday January 23, 2011 @10:05AM (#34972524) Journal

        This is a ridiculous line of reasoning. The $1 salaries taken by high-tech execs isn't about avoiding taxes - it's about leadership and morale.

        It's actually a voluntary decrease in their compensation from previous years, they aren't shifting their salary into bonuses or other forms of pay. You can't accuse them of trying to get around paying taxes because they're not coming out ahead financially.

        Now if you want to blame them for not contributing as much tax as they could, you may have a technically correct point, but good luck trying to frame a valid argument in your effort to make them look bad. And if you do, try not to keep confusing value with compensation- the value a company gets from an employee is not taxable.

    • by headhot ( 137860 ) on Sunday January 23, 2011 @08:39AM (#34972056) Homepage

      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.

  • by Interoperable ( 1651953 ) on Sunday January 23, 2011 @06:45AM (#34971724)

    will tell you that the company in question falls under different tax law than Google or Apple. Apparently, companies with more than 100 shareholders are subject to an additional level of taxation on profits. I don't know any details, but I think that it would be worth looking into before crying foul. At the very least, one would expect the submitter to have read the article, which doesn't seem to be the case.

  • by tm2b ( 42473 ) on Sunday January 23, 2011 @06:52AM (#34971738) Journal
    Don't let reality stand in the way of your snark, but a major portion of Steve Jobs' reward is later granted by the board as stock options.

    Options awarded in this way are a very different topic than hiding income as Sub S profit.

    Publishing this article this way is as stupid as publishing Paris Hilton whining about network protocols would be.
  • I wish a judge would rule that I don't make enough commensurate with the market. Maybe this tax season the IRS will see that I don't make enough.

  • by paylett ( 553168 ) on Sunday January 23, 2011 @07:19AM (#34971810)

    Half the world lives on less than $2.50 a day. []
    80% lives on less than $10 a day.

    We are the super wealthy.

  • by Shivetya ( 243324 ) on Sunday January 23, 2011 @10:17AM (#34972616) Homepage Journal

    A simple consumption tax system would rid us of these problems, but Congress would lose their power to grant favors and impose penalties on entities of their choosing.

    An income based tax system with this many different requirements and exceptions is designed to be abused. A consumption system is not because what good is their wealth if they don't spend it. If you want to soak the rich you simply implement a consumption tax and void all taxes paid up to a specified amount. As in, you determine the amount of spending required to keep people happy and whole and refund it, all beyond that goes into the coffers. This includes taxing services as consumption as well so that getting around the system becomes less likely.

    • by Bigjeff5 ( 1143585 ) on Sunday January 23, 2011 @03:05PM (#34974906)

      On the whole, however the taxes are fair. Individually they seem like a scam, but it works out pretty well.

      The people who own 40% of the wealth in this country (the top 1% earners) pay roughly 40% of the taxes. That's with all their tricks and loopholes to get out of them, they still pay 40%. The people who own 3% of the wealth (the bottom 50% earners) pay about 3% of the taxes.

      On the whole, it's fair. Individually it doesn't seem so, because a lot of those top 1% will be paying almost 50% of their income in taxes, while a huge portion of the bottom 50% pay 0% in taxes, but overall it works well.

      Consumption based taxes would even things out individually, but would flip the scale on its head by class. Someone making $100 million a year isn't likely to spend more than $20-30 million, a frugal multi-millionaire may only spend $10 million. A 20% consumption tax would mean he is only paying 2% of his income in taxes.

      Contrast that with someone living pay check to pay check, making $15,000 a year. They have to spend all of their money every year, so a 20% consumption tax would mean he pays 20% of his income.

      You end up with the people who need every dime they can get their hands on to survive paying the highest percentage of their income in taxes. That can only be considered fair by the cruelest definitions of fair.

  • The rules for an S-Corp and much more have changed in the past year. He should have done his homework.
  • by jht ( 5006 ) on Sunday January 23, 2011 @10:27AM (#34972704) Homepage Journal

    There's a difference between owning/doing business as an S Corp like he does (and I do, as do a lot of independent professionals) and being the CEO of a conventional C Corp. As CEO of a C Corp, you're not the owner, you work for the company. Steve Jobs and other people who get $1 in compensation get paid primarily in stock grants. If the stock rises, they cash it in and get money out when they want to. If the company doesn't do well, worst case is they get nothing - for practical purposes most boards will re-price or reissue options so they get some pay out of it. Lower level execs are usually paid with a combination of more cash pay and fewer options, but current thinking seems to be that a CEO is most directly tied to stock value.

    Also, in many cases with "rock star" CEOs like the ones in tech, they have som much stock from taking the company public in the first place that they don't need much cash compensation, and it doesn't look as cool if they take it.

    In the S Corp world, I think most of us do it for the liability protection. At least at mine, I pay myself a pretty good salary. I take out occasional payments that I pay taxes on - it's usually easier to do it as a bonus in my payroll and have taxes dealt with, especially because I pay bonuses to my employees. The flip side is that owning an S Corp does let you expense things that ordinarily might not be deductible as a regular company employee, like cars and at least part of your housing (as a previous poster mentioned). I keep things very above board - pretty much the only things that the company expenses in my life are my car and its related costs, my cell phone, and any tech I buy that isn't specifically for the house. I could push more stuff on the company if I wanted to be really aggressive, but it's not worth the potential hassle to me.

    The one place where I get hit in return as an S Corp owner is in health insurance - I don't get as much of a tax benefit for my own insurance as I do for that of my employees.

    What this CPA did was pay himself a token paycheck and then push a lot more off as profits. Had he paid himself a higher base - say, $50-$60k he likely wouldn't have had a problem with it and still would have had a nice profit distribution.

  • by theodp ( 442580 ) on Sunday January 23, 2011 @11:01AM (#34972940)

    The "S" Conundrum: Can Dividends be Wages or Vice Versa? []: Any knowledgeable practitioner reading this newsletter will quickly realize that the potential IRS argument that wages are too low is the flip side of the question, when is compensation too high in order to eliminate income for a regular "C" corporation? In both "S" and "C" situations the issue is what is reasonable compensation.

  • by sribe ( 304414 ) on Sunday January 23, 2011 @11:42AM (#34973226)

    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...

    • He didn't get in trouble for the distributions; he paid all the income tax he was require to. He got in trouble for the obvious payroll tax evasion.

      The stock options you are thinking of are incentive stock options (ISOs), and are taxed as capital gains when sold, not as income (though they do force you to take the Alternative Minimum Tax when exercised). Stock grants are non-statutory stock options, and are taxed as income.

      You only pay Medicare and FICA taxes on payroll - i.e. wages and tips. Stock optio

  • by pacergh ( 882705 ) on Sunday January 23, 2011 @03:01PM (#34974884)

    The reason $1 execs don't have to deal with this is simple. Their salary is $1 and they don't make money off of company 'profits.'

    But, you might say, they own stock! In fact, the only reason these folks might agree to such a compensation scheme is the stock!

    And you'd be right, partly. They agree to this for two reasons: 1.) Stock options and 2.) they're already wealthy.

    But this doesn't matter for income purposes. Why? These $1 executives aren't getting profit disbursements or dividends on their stocks. Therefore, they can only make money on the stock options if they sell the stock. (Which, by the way, they're often prevented from doing for a number of years.)

    In contrast, this CPA had a small corporation where he was likely the sole stockholder. (I say likely because I didn't read the link. I'm lazy. Besides, I wanted to show off this knowledge. Oh, and another reason it's likely he's a sole stockholder is because it's likely a professional corporation where only other CPAs can be shareholders. Lawyers, doctors, and other professional get these restraints, too.)

    Trying to 'trick' the IRS by paying yourself a meager salary and then taking the rest in profits won't fly. The IRS can, at their option, treat solely owned corporations like this as sole proprietorships under the tax code. Corporations and LLCs aren't tax vehicles per se; they're liability reduction vehicles under state law. The tax code has simply been designed to allow for tax benefits in certain circumstances, but these are not dependent upon 'structure' as much as it is 'actual use.'

    Basically it comes down to if it looks like a duck, quacks like a duck, and walks like a duck, then the IRS will call it a duck even if the duck calls itself a goose. Similarly, if a CPA tries to avoid tax liabilities by calling himself a corporation, setting himself a salary, and then giving himself a dividend on the rest of the profits then the IRS will call that not a 'profit' but, rather, an 'income.'

    This is totally different from a $1 executive who only gets $1, gets stock options he can't use for 3-10 years, and 'realizes' no income because all he's gotten are stock interests that can't be sold and picture of Georgia Washington.

    The Slashdot contributor is right about one thing -- rich folks do have better tax advisers. Then again, going to bloody H&R Block or simply spending 30 minutes reading the IRS website can give you this information, too.

    It's not rocket science.

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