Slashdot Mirror
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!"
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!!!
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.
This is my footer. There are many like it, but this one is mine.
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.
will tell you that the company in question falls under different tax law than Google or Apple. Apparently, companies with more than 100 shareholders are subject to an additional level of taxation on profits. I don't know any details, but I think that it would be worth looking into before crying foul. At the very least, one would expect the submitter to have read the article, which doesn't seem to be the case.
So if this is the future...where's my jet pack?
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.
MMO Quests are like orgasms:
You may solo them, I prefer them in a group.
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.
"It is our blasphemy which has made us great, and will sustain us, and which the gods secretly admire in us." - Zelazny
"Religion is what keeps the poor from murdering the rich." --Napoleon Bonaparte
the world needs more atheists...
Politics is Treachery, Religion is Brainwashing
Half the world lives on less than $2.50 a day.
80% lives on less than $10 a day.
We are the super wealthy.
Believing something doesn't make it true. Not believing something doesn't make it false.
TFA says he's in Des Moines and claimed $24K in salary for 2002 and 2003. The BLS website shows that the mean annual income for "Accountants and auditors" in Des Moines for those two years was $46K and $49K, respectively.
The SCO lawsuit makes me wish my company were in Utah. We need a new building.
If you are on a fixed salary, you get paid no matter how hard you work (assuming you don't do so little you get fired). If you get paid a $1 salary and your actual income is from stock in the company that you run, then your earnings are directly tied to how hard you work to make the company earn money. Or, to put it another way, you're not earning money unless *everyone* is earning money. It's actually a bit big-S Socialist ;-)
don't forget, you ARE rich to somebody, while somebody else is rich to you.
As an atheist, I am not about to go on a killing spree, I don't care that there are people who are richer, I WANT there to be rich people rather than poor people.
I want people to compete, to create better products/services and if they become rich in the process, I am all for it, as long as I get the spoils of that competition through lower prices/higher quality/more new interesting stuff - that's economic growth.
I don't even need a lot of money, I just need real competition in the market. Real competition, without government intervention. Why is that? Because I want to see companies compete in cut throat environment, where things are deflating in price.
I want prices to fall, I want deflation. I want deflation. Deflation. Deflation of money supply - that's what I want. I want money to become more and more expensive and more and more scarce.
Why is that? Because prices for everything go down as money become more expensive. I don't want inflation. Will the labor prices go down as well? Of-course! But in real competitive market the number of competing entities is so high, that whatever money I have will buy more and more every day.
Those were the actual realities of the USA in 19 century, even though even in those times the US gov't was doing something terrible - helping some people with their monopolies. The robber barons, the tycoons, whatever, those were gov't created. But the prices were falling. New products were created. New industries were created. Entire new job segments were created. Nobody had to work in the field farming 15 hours a day just to feed themselves. More leisure time was created.
--
Do you know what is good? It's when you do not have to work at all or work very very little to feed yourself, so you'd have much more leisure time.
Do you know how that can be achieved?
Through massive automation of production, through new efficiencies and competition.
We see examples of this: computers, TVs, cars, any technologies, some forms of medical attention, and many more things tend towards that because there is real competition there. Who could afford THEIR OWN COMPUTER 50 years ago? Who does not have a computer in their phone or PDA or TV today?
Was this done by poor people? Was this done by governments and monopolies? Or was this done by people who became also insanely rich in the process?
So why would we want to punish success? What we need is to punish FAILURE. And government is not punishing failure, it's punishing success with taxes and it's rewarding failure with money and positions of power.
All of those banks that were gov't created monopolies, that enjoyed gov't FDIC insurance, that had all that cheap money from gov't, that had all those regulations destroying their competition by gov't, all those banks failed. They are failures, yet they are rewarded. The GE CEO now has a high power position in the US government. WHY? Under his watch the valuation of GE fell by over 50%, maybe more, that's insane to reward that!
But that's the way it is - the gov't creates inequality by destroying competitive environment, it promotes FAILURE it denounces success and it's causing the society to be poorer and poorer all the time, but hey, at least we can blame the rich for this.
You can't handle the truth.
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.
How may I ask are you taking a risk if your given shares.
Because most companies don't give straight shares, they give options.
If the stock price goes up, the owner of those options can exercise them, but actually has to pay for the underlying stock. If the stock price goes down, their owner lets them expire, giving them zero value.
So rather than "free money under a different name", stock options as a form of executive compensation more closely resemble a one-sided bet... If he wins, he wins. If he loses, he doesn't really lose anything.
Tying that all back to the situation in TFA, however, it gets a whole lot shadier when you have a one-person corporation - The owner of the company usually already owns 100% of the stock so can't pay himself with more of it (not can he issue options to himself on it).
More practically, he should have done what most sole proprietorships do to hide money - Pay himself as much as he really needs to live, and use the remaining profits on "capital improvements" that he just happens to personally benefit from, ("company" car, new computer(s), perhaps an "office" (aka "place to spend the night for free") in a remote location that he often visits, if that applies). That way, he also gets the perk of claiming depreciation on those assets over time, which we mere humans don't get to do.
This can also reduce your eventual social security benefits
Social security benefits are capped at relatively low levels, he wouldn't get but a small part of those $379k/year after he retired.
According to this link he would get about $11k if he paid taxes on $24k/year and about $26k if he paid taxes on $379k.
So rather than "free money under a different name", stock options as a form of executive compensation more closely resemble a one-sided bet... If he wins, he wins. If he loses, he doesn't really lose anything.
Exactly. Options mean that he can buy n shares for $m per share. If the current share price is greater than $m, then the options are worth $n*m. He doesn't pay tax on the shares unless he sells them. He can exchange them for other shares, including diversified funds that are very low risk. There are also other tricks possible, like taking out a loan (doesn't count as income) with some shares as collateral, not repaying the loan, and having the shares seized by the lender - effectively, he's sold the shares, but the whole thing is actually written off as a loss and so can be used to offset even more tax...
I am TheRaven on Soylent News
A simple consumption tax system would rid us of these problems, but Congress would lose their power to grant favors and impose penalties on entities of their choosing.
An income based tax system with this many different requirements and exceptions is designed to be abused. A consumption system is not because what good is their wealth if they don't spend it. If you want to soak the rich you simply implement a consumption tax and void all taxes paid up to a specified amount. As in, you determine the amount of spending required to keep people happy and whole and refund it, all beyond that goes into the coffers. This includes taxing services as consumption as well so that getting around the system becomes less likely.
* Winners compare their achievements to their goals, losers compare theirs to that of others.
There's a difference between owning/doing business as an S Corp like he does (and I do, as do a lot of independent professionals) and being the CEO of a conventional C Corp. As CEO of a C Corp, you're not the owner, you work for the company. Steve Jobs and other people who get $1 in compensation get paid primarily in stock grants. If the stock rises, they cash it in and get money out when they want to. If the company doesn't do well, worst case is they get nothing - for practical purposes most boards will re-price or reissue options so they get some pay out of it. Lower level execs are usually paid with a combination of more cash pay and fewer options, but current thinking seems to be that a CEO is most directly tied to stock value.
Also, in many cases with "rock star" CEOs like the ones in tech, they have som much stock from taking the company public in the first place that they don't need much cash compensation, and it doesn't look as cool if they take it.
In the S Corp world, I think most of us do it for the liability protection. At least at mine, I pay myself a pretty good salary. I take out occasional payments that I pay taxes on - it's usually easier to do it as a bonus in my payroll and have taxes dealt with, especially because I pay bonuses to my employees. The flip side is that owning an S Corp does let you expense things that ordinarily might not be deductible as a regular company employee, like cars and at least part of your housing (as a previous poster mentioned). I keep things very above board - pretty much the only things that the company expenses in my life are my car and its related costs, my cell phone, and any tech I buy that isn't specifically for the house. I could push more stuff on the company if I wanted to be really aggressive, but it's not worth the potential hassle to me.
The one place where I get hit in return as an S Corp owner is in health insurance - I don't get as much of a tax benefit for my own insurance as I do for that of my employees.
What this CPA did was pay himself a token paycheck and then push a lot more off as profits. Had he paid himself a higher base - say, $50-$60k he likely wouldn't have had a problem with it and still would have had a nice profit distribution.
-- Josh Turiel
"2. Do not eat iPod Shuffle."
The rich got wealthy off the backs of the middle class, you ass clown.
- please, provide your definition of the middle class. Because the middle class was created in USA in 19 century - it was small business owners, professionals and such.
The 'middle class' you are thinking of is no such thing. After WWII the 'middle class' of America was actually the working class, which didn't have competition from outside countries, because most countries outside of USA didn't have any capital and infrastructure left after the war.
Your 'middle class' idea is a fluke, caused by war and lack of competition.
Without a 290 million person pool of consumers to sell shit to, just within the Continental US
- but that 'SHIT' that people are buying, is what makes them wealthy. Not just silly pieces of paper with funny pictures on them. It's the stuff you buy that gives you quality of life. If just fiat currency itself was wealth, then Zimbabwe would have been the most prosperous country on earth, why anybody has hundreds of trillions of Zimbabwe dollars (and don't forget, before they did this to themselves, their dollar was at par with US dollar, so US dollar can also be there.)
Then bitch when the well dries up and your good or service is no longer worth squat and the principle value of the currency is worthless
- you are very confused. The GOOD and SERVICE is what WEALTH IS.
It's not the worthless currency.
Only goods and services improve quality of life, that's what rich people do - they come up with capital and labor organization to give you your quality of life.
The 290 million US consumers are a drop in a bucket at this point. Real consumers today are in Asia, because they are producers, and people who do not produce have nothing to exchange for, so they are no longer real consumers.
You can't handle the truth.
The "S" Conundrum: Can Dividends be Wages or Vice Versa?: Any knowledgeable practitioner reading this newsletter will quickly realize that the potential IRS argument that wages are too low is the flip side of the question, when is compensation too high in order to eliminate income for a regular "C" corporation? In both "S" and "C" situations the issue is what is reasonable compensation.
Jobs et al do not get in trouble with the IRS because they do not, after having paid themselves $1 salaries, turn around and distribute their companies' entire profits to themselves at the end of the year. Profits are retained by the corp and taxed at a pretty high rate, or distributed to shareholders and taxed. Whereas with an S corp, all profits flow through to the shareholders, and the corp itself pays no taxes.
And yes, they pay taxes on their stock options. In fact, gains from stock options at the moment they're exercised are treated as ordinary income and subject to normal income tax rates + FICA + Medicare. I don't know about the treatment of stock grants...
None of the people mentioned in the summary are sole owners and sole shareholders of the companies for which they work.
Soulskill and theop should stop sucking each other off long enough to grow some brains and learn the difference between the two situations.
Options often also have a minimum share price before they can be exercised.
I.e stocks are $40 each right now, and the company gives him options that can be exercised at $50 after two years. That gives the CEO an incentive to both focus beyond next quarter's earnings and ensure the company is as profitable as possible after two years.
They keep giving the CEO these things though, so it's like dangling a carrot in front of him.
That and bonuses are how the $1 club makes its money, and it's usually a pretty good arrangement for the company. It really can't backfire any worse than a fixed salary (if the company goes under it's not like the salaried CEO pays anything either), and if done right it can provide a huge boost in morale and CEO effectiveness.
Why do you think the top companies out there do it? The CEOs of these companies are clearly personally invested in the company's success, and while stock options are probably not the cause of that personal investment they certainly reflect it.
Security is mostly a superstition... Avoiding danger is no safer in the long run than outright exposure. - Helen Keller
The reason $1 execs don't have to deal with this is simple. Their salary is $1 and they don't make money off of company 'profits.'
But, you might say, they own stock! In fact, the only reason these folks might agree to such a compensation scheme is the stock!
And you'd be right, partly. They agree to this for two reasons: 1.) Stock options and 2.) they're already wealthy.
But this doesn't matter for income purposes. Why? These $1 executives aren't getting profit disbursements or dividends on their stocks. Therefore, they can only make money on the stock options if they sell the stock. (Which, by the way, they're often prevented from doing for a number of years.)
In contrast, this CPA had a small corporation where he was likely the sole stockholder. (I say likely because I didn't read the link. I'm lazy. Besides, I wanted to show off this knowledge. Oh, and another reason it's likely he's a sole stockholder is because it's likely a professional corporation where only other CPAs can be shareholders. Lawyers, doctors, and other professional get these restraints, too.)
Trying to 'trick' the IRS by paying yourself a meager salary and then taking the rest in profits won't fly. The IRS can, at their option, treat solely owned corporations like this as sole proprietorships under the tax code. Corporations and LLCs aren't tax vehicles per se; they're liability reduction vehicles under state law. The tax code has simply been designed to allow for tax benefits in certain circumstances, but these are not dependent upon 'structure' as much as it is 'actual use.'
Basically it comes down to if it looks like a duck, quacks like a duck, and walks like a duck, then the IRS will call it a duck even if the duck calls itself a goose. Similarly, if a CPA tries to avoid tax liabilities by calling himself a corporation, setting himself a salary, and then giving himself a dividend on the rest of the profits then the IRS will call that not a 'profit' but, rather, an 'income.'
This is totally different from a $1 executive who only gets $1, gets stock options he can't use for 3-10 years, and 'realizes' no income because all he's gotten are stock interests that can't be sold and picture of Georgia Washington.
The Slashdot contributor is right about one thing -- rich folks do have better tax advisers. Then again, going to bloody H&R Block or simply spending 30 minutes reading the IRS website can give you this information, too.
It's not rocket science.
It is a tax loophole basically for the common man.
ah.
that explains why they're stamping down on it.
Out of interest is there any solid definition of what a 'reasonable' amount is in this context?