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Getting a Bonus3/28
We are a small cabinetry company that had our best year to date last year. We are set-up as an LLC with me having a 50% share and another family having a 50% share. I've asked this question to several accountants but keep thinking there has to be a better way.
I want to pull out a large bonus from the business. Throughout the year, I get a paid a modest salary and like every other employee I see the taxes taken out of my check. Being a business owner, I then in turn write another check to cover the employer side of the taxes. I'm being told that I need to pull a bonus in the same manner as my weekly checks. If I do that that means that my taxes will be paid for both the employee and employer side which on a large check that's a big chunk of money.
For example - If I get a $100K bonus to me personally, that check looks closer to $82K due to the taxes. Then my business will have to write a check to Uncle Sam for approx. $36K to just cover the taxes. The hit to the business will actually be $118 when you consider the expense of the bonus plus the tax payment.
Is this what everyone else is doing? This just seems like a huge tax bill that I'm having to flip just to pay myself the money that I've all ready earned.
I'm hoping someone out there has been doing this for years and can tell me how they distribute their bonus money with the least amount of tax burden.
Thanks for the help.
I guess you could do like the really big boys, and put it in an offshore account. But if you want to do it legally, pay the taxes! It's income, it's taxable.
I setup my company as an S corp, pay myself a set salary so that my "profits/distributions" get taxed at a lower rate.
What you describe sounds more like a C corp where double taxation comes into play. An LLC doesn't have the double taxation problem. It's a pass-through. The business pays no tax. All the profits are taxed as individual income. Sounds to me like you don't understand your structure. If I were you, I would talk to an accountant.
An LLC is taxed just like an S-Corp.
You don't mention whether your partner is working in the business or just an owner. It sound like (s)he isn't, and so you are looking for the extra compensation for your efforts. Good for you.
Your math and your understanding are correct. Because you have a huge chunk withheld all at once only means you would probably be in line for a refund. I agree with above, pay your taxes and sleep well. I'm not a proponent of huge refunds, so what about taking the bonus quarterly?
Your other option is to take a distribution. This is removing the income in the business that has already been taxed (on your K-1 statements) - so $100K distribution is actually $100K to your pocket and only $100K cash paid out. The problem is that legally, distributions have to be paid in proportion to ownership, so this should be 50K to each partner. If your partner is in agreement, you write 2 checks and he endorses his over to you. Optionally, you write one and book in the GL as 2. We do this for a small management fee paid to one partner on our building. (The second choice isn't a big deal unless your partner is NOT in agreement and he cries embezzlement. You didn't state the relationship.) For the distribution to work, though, you have to have the retained earnings in the company to make the payment.
You seem to be going off-track by assuming or believing that everything withheld from your check has to be matched by the LLC.
Only FICA (5.65%) involves an employer payment equal to the withheld employee payment.
That makes the total cost about 106K (round numbers) as the rest of the cost to the LLC is just money paid over to the feds that was already withheld from you -- both FICA and federal income tax. I'm ignoring minor FUTA amounts.
Assuming your estimate of the net check to be correct (and it very well might be) that's 100K gross minus 6K FICA minus 12K income tax withholding = 82 K.
LLC must pay 12K FICA (6K each, your half already withheld from you) plus 12K income taxes already withheld = 24K, made up of 18K withheld from you and 6K of FICA tax cost to the LLC. (All round numbers.)
Total is about 106K, not 118K. Big difference.
Perhaps more important is whether your 50% shareholders also expect some sort of payout.
Beyond that, I'd consult an actual CPA, not just anyone who calls themselves an "accountant," because so far you're either being given bad advice or not listening closely enough to good advice.
You should also determine whether or not your LLC has elected to be taxed as an S corporation (essentially flow-through to the individual returns of the shareholders and taxation as a partnership.)
This junk is important when there are non-trivial dollars involved. Which is why you need a real CPA and shouldn't be seeking advice on a board full of great woodworkers, none of whom are CPAs.
I know more than I ever wanted to know about taxation, but I'm not a CPA, either.
Get your advice from a professional.
So, Steve, you are a prime example of why I always tell people who are looking for free advice in the wrong place not to do that.
First, an LLC is not necessarily taxed like an S corporation. It's an ELECTION that has to made. Usually by filing a Form 8832 ELECTING to be taxed as a corporation and then a Form 2553 ELECTING to be taxed as an S corporation.
Second, his math and understanding are NOT correct -- at all -- see above.
Third, quarterly payment versus annual makes NO DIFFERENCE. You'd know that if you had ever even so much as bothered to look at IRS withholding tables. See Publication 15.
Fourth, what you suggest about "write 2 checks and he endorses his over to you" amounts to criminal tax fraud. Up to 5 years in the federal pen plus up to a 100K fine if you get caught.
See 26 USC §7201:
"Any person who willfully attempts IN ANY MANNER to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony ..." (emphasis added.)
How would you get caught? Any one of the three returns gets audited. The LLC's, yours, or his.
Either SOMEONE would have had to issue a false and fraudulent K-1 or someone has filed a false personal tax return.
The reported numbers won't add up. Some shareholder (or both) might "forget" to report the right amount of income. The bad possibilities go on and on. If properly reported income would have resulted in more tax due, oops, you have run afoul of 7201.
When 50K is involved, they sometimes actually pay attention. Not the sort of attention you want. Who needs even a guilty plea to a lesser tax charge for playing stupid tax games?
Think that your bank wants to see that on your business credit application? Fail to mention it on your application? Now you're committing bank fraud.
This sort of really, really stupid stuff is how people get in trouble when it's simply much easier to do things the right way in the first place.
To Kevin I can only say, again, get a CPA. Then listen to him or her.
So, Econ101, you make some good points. I didn't recall the election we made on the LLC and I don't know the commonality of making that election. My advise was predicated on the Sub-S treatment and if so, the distributions I made reference to have no "evading tax" consequences from a company standpoint. Those are pretty strong words. It could be interpreted as such if these were pre-tax dollars. I guess perhaps you might also be referring to gifting or other stuff regarding transferring the money after the fact, and I didn't give that any consideration, so that's a point well taken.
The quarterly versus single payment would reduce the fed withholding, but not significantly. Running a manual check in my payroll company's system calculated a $37654 withholding for a single employee with 1 deduction. Quarterly payments withheld only $7954 per check, for a total of $31816. It is true that whichever way it is paid, the final tax liability to the taxpayer will be the same. Depending on the state, something like this might also be applicable. My state and local taxes are flat percentages, so it wouldn't matter here.
All-in-all, a serious discussion with the partner and CPA at the same time about fair compensation is warranted.
Please get an accountant. I am not sure how you do your books I'll guess Quickbooks. If so there you can find an accountant on the QB website. They are certified and have the software. If you run into trouble with the software they can help. Then it makes doing your taxes, keeping things clean and depreciation...very easy.
THIS IS NOT THE PLACE TO GET TAX ADVISE.
Well, Steve, thank you for admitting that virtually everything you said in your previous post was useless.
I'm not sure what you mean by "commonality," as any election applies to ALL of the parties.
My "strong words" were directed at any tax treatment that is fraudulent, doesn't particularly matter whether it's from the LLC's standpoint or not. It's the totality of the transaction that matters to the IRS. And there's at least 3 returns involved in this.
You might want to check the efficacy of your calculations and/or your software provider's withholding tables, as the IRS 2017 tables say otherwise:
IRS Pub 15, Table 5, single, after allowances, 100K, no other compensation, quarterly:
Annual? Table 7: 20338
Add more underlying income? Switch to married? Makes no difference at all. It's all the same, ignoring a dollar or two of rounding errors.
In any case, as you said, "the final tax liability to the taxpayer will be the same" (or it should be.) That's absolutely true -- quarterly v. annual simply doesn't matter AT ALL.
State and/or local taxes also make no difference as we're talking about the feds here.
All-in-all, beyond dismissing virtually everything else you said, I wholeheartedly endorse this comment you made:
"All-in-all, a serious discussion with the partner and CPA at the same time about fair compensation is warranted."
I would only add "and how to do it legally and above-board."
Dean, I'm sorry, that was clearly my mistake.
You're (almost) correct, 7.65 is the total of employee FICA -- 6.2 SS and 1.45 Medicare.
Not 5.65 as I stated (which is something like the good old days of the '70s.) Not sure how a "5" got into the equation instead of a "7", considering that I'm very well used to paying the (2 times 7.65) 15.3 rate as an employer and for self-employment.
I apologize for my error.
But, it changes nothing significant about anything I've written above. It only jiggles the amounts around by a couple thousand in the initial scenario.
Thank you for the responses. I believe in my attempt to keep from writing a book on taxes I left out some vital info. I outsource our payroll to a bookkeeper and also hire a CPA to perform the tax prep, business license, and other state taxes. They have advised me take the bonus and pay the tax rate like a normal payroll check. Maybe I'm hung up on the amount of the taxes but it seems like a large sum to be paid when I'm basically giving myself my money.
Some of you got hung up on the numbers. What I really wanted to know is how to do YOU pull bonuses from YOUR company?
We take bonuses as payroll, we take distributions for payment of personal taxes (sub chapter s).
I'm an S Corp, and when I want a bonus I do it by adding whatever amount it is to my regular salary, and reporting it to Paychex. They deduct whatever taxes are owed. Very simple. I don't understand why you think that you should be able to take home substantial amounts of money without paying taxes. Guess what? Make money, pay taxes. And I agree with Econ 101: don't ask for advice here, speak to a CPA, and do what they tell you, and get over the horror of owning up to your responsibilities as a business owner and citizen.
I do the same as a S corp.
You should only come to the woodweb for legal advice, medical advice, and of course investment advice.
OTOH it is useful to hear others experiences.
You can offset your tax liability with Rule 179 depreciation, contributions to a top heavy 401k plan, max personal contribution to a 401k plan. Some states still have enterprise zone tax credits for employees.
All are uses of profits that reduce taxable profit.
Then use a properly adjusted EBITA on FS.
Alan F., how does a machine depreciation clause effect a salary bonus?
Alan F., but he's not talking about investing in machinery, he's asking about paying less tax on a bonus. So that's why I am confused.
Sorry for the confusion, on the other hand if its a 2017 bonus then rule 179 purchases would offset tax liabilities and the taxes withheld out of the bonus could be reduced.
Its simple math give 100% of tax liability to the government or some to your self and your vendors and some to the government.
You make 150k profit, you buy a 150 k machine. 0 tax liability, you gave the vendor 150k, government 0 and 52.5k of the machine purchase is money you were going to give to the government so that cash was gone, so out of pocket you spent an additional 98 to save 52 and got a machine. and your bonus has close to $0 income tax withheld or close to it so you just pay the FICA and medicaire and state.
or you borrow the 150k, you put 52k in a 401 k or IRA and your also write off the interest.
The short answer is hire a real business CPA /tax person for advise that is capable of financial planning and not just getting taxes correct.
He wants to pay a bonus to himself. He's not talking about doing anything with the business, he's trying to reduce the personal taxes he has to pay on a bonus to himself.
Reducing the business profit and his tax liability means he gets to keep more of the profit.
The easiest way to reduce profit is depreciation, then deductible contributions to yourself.
That's why I focused on the business to reduce the personal tax hit.
He could of course have more children, get some real estate that has deprecation, basically anything that reduces income while maintaining positive cash flow and value.