Paying dividends and wages in a C corp

Forum|Forum|2 years ago
June 4, 2023
1 reply
0 views

I am in California, and I am thinking of forming a C corporation because I do not plan on making any significant amount of money and the idea of being able to put money back into the business without it being initially taxed in the form of retained earnings etc is appealing.

I know this question has been asked multiple times, but I still am having trouble understanding.
My question is:

Is it possible to reinvest ALL of my money back into the corporation without paying any initial taxes on it until wages are paid or distributed?

In other words, if I make a small amount of income, let's say $10,000, can I choose to withhold accepting a wage as an officer, if so, how would I go about doing so? Would I have to create some form of legal document similar to a deferred compensation agreement?

Or is the only option to pay myself a fair wage or dividends, then pay tax on the $10,000 minus the deductions, and then hold the excess income as retained earnings?

Best answer by Anonymous_

@Dean241 wrote:
In other words, if the corporation makes $10,000 net income is there any legal way that I can just keep that income within the corporation without paying myself a wage as an officer even though I worked full time for the corporation?

You can certainly retain the $10,000 within the corporation without paying yourself a wage or salary, but the corporation will have to pay federal income tax on its taxable income.

In other words, there is no way you and the corporation can not pay federal income tax on the net income of $10,000 (either the corporation will pay the IRS or the corporation can pay you a salary and then you will pay the IRS).

Anonymous_

Employee

C corporations are entirely separate and distinct taxable entities; they pay income tax on their taxable income, regardless of how that net income is utilized.

If the C corporation pays you a salary of $10,000, the corporation's taxable income would be reduced by that amount and it would issue a W-2 at the end of its tax year which, in turn, you would report on your individual income tax return (1040).

Dean241Author

My question was can I choose to withhold accepting a wage as an officer, if so, how would I go about doing so? Would I have to create some form of legal document similar to a deferred compensation agreement?

Or is the only option to pay myself a fair wage or dividends, then pay tax on the $10,000 minus the deductions, and then hold the excess income as retained earnings?

In other words, if the corporation makes $10,000 net income is there any legal way that I can just keep that income within the corporation without paying myself a wage as an officer even though I worked full time for the corporation?

Just to confirm, you saying that is not possible to keep the income within the corporation if I can find a legal way to not pay myself a wage by using some legal arrangement such as deferred compensation?

Anonymous_Answer

Employee

@Dean241 wrote:
In other words, if the corporation makes $10,000 net income is there any legal way that I can just keep that income within the corporation without paying myself a wage as an officer even though I worked full time for the corporation?

You can certainly retain the $10,000 within the corporation without paying yourself a wage or salary, but the corporation will have to pay federal income tax on its taxable income.