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