If I incorporate, when do I have to start paying myself a salary?
I plan to incorporate, mainly for the liability protection. My business is Internet-based and the operational costs are quite low, so I plan to fund everything out of my own pocket, and I have the funds to do so. My question is when do I have to start paying myself a salary? Is it ok to basically work for free for the corporation until it starts earning money and then give myself a salary?
3 Answers
There's no reason you have to draw a salary. Plenty of founders take either nothing or a very modest salary, because why would you take your own money you out of the business and presumably get taxed for the privilege?
Long term, you clearly want to make money, and you will want tax advice for how best to do that. But getting started, keep everything as simple as possible.
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In particular, it seems that a startup founder's major source of income would be from increased value of the company, and his equity in that. Example: Steve Jobs, on his return to Apple, took a $1/year salary + some killer benefits (on the corporate nickel) + a boatload of stock. As you can imagine, that worked out quite well for him. Adjust to suit your business needs, of course. – Olie 12 years ago
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I agree keeping it simple is good, but if you are in the USA the IRS frowns on only taking dividends if you do work for the company instead of having only an investment role. If you are a S Corp, you'll draw more scrutiny for doing that. However, most S Corp owners take a modest salary based on earnings, and dividend the net profits. Just be sure the ratio is reasonable for your profession. There is plenty of IRS guidance and case law if you are concerned, and of course, you should always consult your tax accountant/lawyer for tax advice. – Bahri Gungor 12 years ago
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I'm confused here; if you are a small startup, how do you have income to live off of for bills/etc. if you don't have a salary? The business can't pay your costs if you're incorporated, right? Or can you somehow have income just in the form of a really large dividend based on your percentage of ownership? – Bart Silverstrim 12 years ago
There is no requirement that you ever pay yourself a salary.
At some point (hopefully) you will start making money and will want to take some of it out of the corporation for yourself. At that point there are various ways to transfer money from the corporation, salary being one of them. Another way a company can distribute money is dividends. How best to organize these things to minimize taxes as well as other considerations is important to consider.
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Heads up that in the USA the IRS may audit and fine subchapter S business owners who take dividends but not W2 or schedule C/SE income since dividends are exempt from payroll taxes. They see this as payroll tax avoidance. When you start taking dividends it will be smart to also take W2 or 1099 income which will be subject to payroll taxes. – Jmp 12 years ago
It's completely up to you when you start paying yourself a salary, but I'd say, if you expect the company to make profit, don't wait until the company starts earning money, and give it a director's loan so you could start paying yourself from the beginning of the new tax year. It, of course, depends on where you live, but for example in the UK this way you could spread the salary over the year and pay less tax and insurance. In the UK you must pay national insurance (about 25%), if you earn more than 107 quid a week. So even if your company doesn't earn money now, you might want to use the insurance-free treshold and save a bit. I'm not sure how this works in the USA, but it might be worth checking.
