As a founder/shareholder/officer in a startup, do I pay myself as an employee(W2) or contractor(1099-MISC)?


I've looked around, but can't seem to find a straightforward answer for this.

I am one of 4 founders in a start-up incorporated as a C-corp. 2 of us work full-time on the start-up, and so far have not been taking any pay, but we would like to start.

What's the way to do it?

Since we are only going to be able to pay ourselves randomly depending on cash-flow, and most definitely below minimum wage, doing payroll and W2's doesn't seem to make sense.

But on the other hand, I keep reading that officers of a corporation should not be classified as contractors.

Is it okay to pay ourselves as contractors while being officers or should we be doing payroll, in which case, we would not meet minimum wage requirements?

Co-Founder Tax Independent Contractor Salary

asked Sep 8 '11 at 14:18
106 points

3 Answers


I know some founders in similar situations - and most of them pay themselves as contractors. This is not strictly correct - but it is MUCH cheaper and simpler (in terms of paperwork, payroll services, payroll taxes, etc) than paying yourself as an employee.

Your risk profile from this is pretty low, especially if the company files a 1099 for payments to you - that 1099 will cause you to have to pay self employment taxes on that income. Thus, the government is receiving taxes on your compensation, just not the same amount as if you were paid a salary. So, in the highly-unlikely scenario that you get audited, you can rightly claim that you were paying taxes - just not the "correct" ones.

answered Feb 8 '12 at 11:25
19 points


You should be paying yourself via payroll.

From IRS document "Paying Yourself" :

An officer of a corporation is generally an employee...


You cannot designate a worker, including yourself, as an employee or
independent contractor solely by the issuance of Form W-2 or Form
1099-MISC. It does not matter whether the person works full time or
part time. You use Form 1099-MISC, Miscellaneous Income (PDF) to
report payments to others who are not your employees. You use Form W-2
to report wages, car allowance, and other compensation for employees.

If you were an LLC, you would have different rules.
answered Feb 9 '12 at 08:51
Michael Pryor
2,250 points


When you do accrual accounting (what you should be doing as a company), what you are paid (seen as an expense to the company) is not the same as what you receive (what you get in your bank account. You can pay yourself a normal salary and calk it up to 'salaries payable' for the future then pay out of that payables account as cash allows. This should not cause a problem with minimum wage laws since you are getting paid, just in debt instead of cash.

Another idea is dividends, as lrobb wrote but then you have double taxation, which you would generally want to avoid.

answered Sep 8 '11 at 23:53
1,194 points
  • Debt is actually something I had not thought about, it's an interesting idea, but it doesn't seem clean adding debt to my balance sheet. – Sid 13 years ago
  • Also the fact that we would be paying payroll taxes on the full amount doesn't make it a great option. – Sid 13 years ago
  • Hmmm, it's an interesting point. I'm not sure you would have to pay payroll taxes on unpaid salaries. That is, you might not have to pay payroll taxes until you actually transfer the pay to the employee. – John 13 years ago

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Co-Founder Tax Independent Contractor Salary