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!"

Comments

The Joys of employeehood....

[rajeevrk]

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!!!

Re:The Joys of employeehood....

[Sique]

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!

Re:The Joys of employeehood....

[Sique]

No, the government is one of the methods to do politics, which is understood as "trying to influence society en large or en detail to further your interests". And one of the biggest interests of an employee is to get paid, otherwise an employee would not agree to an employment contract anyway.

Off Topic Rant

[definate]

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

[Dcnjoe60]

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.

Wow! Delusional much?

[SmallFurryCreature]

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.

Re:Wow! Delusional much?

[Grond]

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.

Re:Wow! Delusional much?

[Grond]

I don't see a problem with the people who make around $70k and up holding 85% of the country's wealth.

But the top 1% hold fully 34.6% of the wealth. The curve gets very, very steep above the top 5%. That's where increased taxation needs to be aimed.

The demarcation point to *be* in those groups is low, and attainable

Actually, class mobility in the United States is terrible. "By international standards, the United States has an unusually low level of intergenerational mobility: our parents’ income is highly predictive of our incomes as adults. Intergenerational mobility in the United States is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark." Source. European social democracies are better at the American dream than America is.

And yes, many people may be able to achieve that level of income, but these days that often requires taking on significant educational debt. Their real income is much lower than the raw figures would suggest. Furthermore, inflation-adjusted income growth in the middle class has been virtually flat for years, whereas the rich have seen their income growth vastly outpace inflation. Source.

Should we propose that we take the wealth held by people making $70k a year and up because those people hold 85% of it?

You'll note that I said "If anything [the rich] should be taxed more at the high end." There should be new tax brackets at very high end (e.g. $500,000 or $1 million). This would be consistent with the post WWII income tax, which had a high marginal rate of ~90%. Source. That didn't seem to hurt the massive post WWII economic boom.

What would be the point of doing the work to get above that level?

Do you understand marginal taxation? It's always better to make more money.

Re:Wow! Delusional much?

[Junta]

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.

Re:Wow! Delusional much?

[sjames]

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:Why Jobs and Ellison don't get in trouble

[mallydobb]

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.

Wrong - Jobs awarded options by board

[tm2b]

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.

We are the super-wealthy

[paylett]

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

We are the super wealthy.

Re:A read through the article...

[BeanThere]

All the more reason it's time to simplify the 8000+ page tax code.

Have you spent any time in a poorer country?

[fantomas]

Have you spent any time in a poorer country? If so you'll know what a precarious living a lot of people have, and how many literally die on the streets from starvation or disease. 2.50 might get you more, but not a lot more.

People rioted this year in India over the price of onions rising. People have rioted in Tunisia and Algeria over the prices of cooking oil and flour. These are not wealthy people. These are not people rioting over not being able to put enough gas in their 8 litre SUV, or not being able to upgrade to the latest games console.

These are people rioting over not being able to eat enough to live. Onions, cooking oil, flour.

You should be ashamed of yourself. Or at least offer to live on the equivalent salary in your own country, a living so close to starvation that if the price of onions goes up you might die.

Re:Why Jobs and Ellison don't get in trouble

[Monchanger]

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.