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IRS Nails CPA For Copying Steve Jobs, Google Execs
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!"
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.
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.
The SCO lawsuit makes me wish my company were in Utah. We need a new building.
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.
Security is mostly a superstition... Avoiding danger is no safer in the long run than outright exposure. - Helen Keller
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.
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.
I am an ACCA student. Got a query on Accountancy/Finance? Maybe I can help!