FICA withholding question

I own a company in which I earn well over the SS limit. If I pay myself salary in a second company, can I be exempt from withhold SS if I don't draw any salary until after I'm over
the limit in company A? Although I realize I can get the overwithholding back on my 1040, the employer's portion is lost. Thanks,
Tommy
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Arnie wrote:

No, you are not exempt from SS witholding by a 2nd employer. Yes, the employer's portion is lost. << ======================================================= >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2006) - All rights reserved. >> << ======================================================= >>
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Arnie wrote:

No. Withholding by Company B has nothing to do with Company A withholding, and is required for all salary paid by Company B.

That's the way it works, sorry.
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No
What you're overlooking is that FICA is an equal tax on the employer and the employee, and each pays to the current earnings limit. Since there are two corporations paying you, both have to pony up the FICA. Looking at just this aspect it would make sense to merge the corps, but there could be dozens of reasons not to. -- Phil Marti Clarksburg, MD
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Nope, you can't self-exempt yourself from the Social Security and Medicare withholding and company matching. Yup, you'll get back any over withholding on Social Security, but not Medicare (it has no limit). Nope, the company can not get back a similar amount due to your over withholding of Social Security taxes. FYI: You'll also have double the FUTA and SUTA tax in most cases. If the second company contracts with the first company for services (that you provide to the second company), company B can take the expense deduction, Company A reports it as income, and they increase your salary accordingly for a net wash (or close to it). Run that by your CPA or EA to see if it makes sense given your specific set of circumstances and to hold it up to local laws. -- Paul Thomas, CPA snipped-for-privacy@bellsouth.net
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snipped-for-privacy@aol.com (Arnie) posted:

Aha! Part of the plot is revealed. <g>
Since every company is an "entity" presumed to have no knowledge of the "other" companies around the country, each company must follow the rules independent of any such "knowledge." This, of course, accrues to the benefit of the government. AFAIK, there is no provision for employers to receive credit for "unnecessary" FICA tax shares paid in behalf of employees whose total income exceeded the limit, because of secondary employment for another firm. Likewise, knowledge of such facts cannot be used to discontinue or diminish the amounts of FICA withheld or paid by any company. Bill
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No.
-- Vic Roberts Replace xxx with vdr in e-mail address.
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In general, no. (And the company portion is lost either way.)
If you own both companies, why not have company A sell your services to company B, while A pays you? (Actually, you need only own A to use that method.) Then there's no issue of double SS taxes. Seth
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Arnie wrote:

The normal rule is that each company would have to withhold and pay social security taxes independently, resulting in double payment of the employer's portion. There is an exception to this rule, found in Code section 3121(s), in the case of employment by related corporations if the related corporations use one of the related corporations as a common paymaster. I'd check out this section with your accountant--you may be able to avoid the double taxation. --Chris
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No, the second company cannot, in general, take into account the wages the first company paid to you. However, if the two companies are "related corporations" for purposes of Code Sec. 3121(s), and if there is a common paymaster (i.e., if the companies have an agreement between them that one company will act as paymaster for the other, and that the paymaster will disburse remuneration to employees and will keep books and payroll records), then you should be treated as having one "employer" for FICA purposes, in which case your aggregate wages from both companies would be taken into account in determining both the employer and employee portion of the FICA tax. << ======================================================= >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2006) - All rights reserved. >> << ======================================================= >>
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You could simply have one corp. pay a management fee to the other. << ======================================================= >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2006) - All rights reserved. >> << ======================================================= >>
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Mike Wellman wrote:

Well thats the direction we're going, except its a 2 man company and we need 2 people to get group health insurance. I notice that Steven Jobs draws a salary of $1. I'm sure he still qualifies for benefits. Can a CEO elect to pay himself less than the minimum wage in a company that doesn't make any money? Or another angle, if the company would lose money if the CEO drew salary, can he elect not to pay himself to avoid a loss? TM
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The minimum wage seems to apply only to workers paid by the hour and not to people on salary, though I don't know the technical difference, if any beyond the declaration, between the two.
As for your second question - certainly. I am the President and only employee of a consulting firm registered in NY as a C Corporation. My salary varies with the funds available at the end pay period - usually the end of each quarter, and perhaps more frequently if I have a good quarter.
I have often had quarters when I drew no salary, either because funds were low and/or I needed to hold some funds for an upcoming purchase or project. My company operates on a cash basis, so money usually arrives 30 to 90 days after I do the work. That means that I can be very busy during a quarter when no money has come in.
-- Vic Roberts Replace xxx with vdr in e-mail address.
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Only people who meet certain criteria (managerial, professional, etc.) can be on salary (technically, "exempt"). Seth
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snipped-for-privacy@panix.com (Seth Breidbart) wrote:

On salary is not the same as exempt. Someone can be paid hourly and be exempt, and on salary and not be exempt. If you're paid hourly, but are exempt, it means they don't have to pay you overtime for the extra hours you work. When you're on salary, but not exempt, they have to pay you extra for the extra hours you work. That's a mistake that a lot of companies make, equating the two. But they can get into a lot of trouble if they don't understand the difference. Stu
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So far everyone seems to have avoided the issue of not paying FICA/Medicare taxes on this income. If a CEO is paid a salary of $1 and restriceted stock of $1million, which is notg uncommon in some situations, how does FICA/Medicare tax get collected? If poor Joe Taxpayer who owns a small S Corp or even C Corp tries to say he agreeed to work for only $1, how far would he get? Why does a CEO of a Firtune 500 get to take just a $1 salary? And how does FICA/Medicare get their cut?
--
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH

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How does the income tax on the $1million get collected?

It has happened; one company (David's Cookies, ISTR) the President/Owner took no salary the year before going public in order for the company to look profitable.

Tell your company you want to work for $1 a year and see just how easy it is.

Somebody pays it.
Seth
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Art wrote: ""So far everyone seems to have avoided the issue of not paying FICA/Medicare taxes on this income. If a CEO is paid a salary of $1 and restriceted stock of $1million, which is not uncommon in some situations, how does FICA/Medicare tax get collected? If poor Joe Taxpayer who owns a small S Corp or even C Corp tries to say he agreeed to work for only $1, how far would he get? Why does a CEO of a Firtune 500 get to take just a $1 salary? And how does FICA/Medicare get their cut?"" In the example you give, it would depend on how Sec. 83 applied to the restricted stock, either on the date of grant or at some later date when the restrictions lapse or the stock is otherwise sold. Under Sec. 83, the fair market value of property received as compensation for services performed, less any amount paid for such property, is included in the recipient's gross income for the first taxable year within which such property is transferable or not subject to a substantial risk of forfeiture. Once the restricted stock in your example is transferable or no longer subject to a substantial risk of forfeiture, the FMV of the stock at such time, less any amount paid, is gross income from the performance of services and, if the recipient was an "employee" for payroll tax purposes, is subject to FICA, FUTA and wage withholding. Further, if the recipient sells his interest therein in an arms' length transaction prior to the time his rights either become transferable or are no longer subject to a substantial risk of forfeiture, the same result applies as of the date of sale, in which case the sales proceeds are ordinary income rather than capital gain unless the recipient had made a Sec. 83(b) election at the time of initial receipt. If an 83(b) election is made, the FMV, less amounts paid, is included in income at the time of receipt notwithstanding restrictions on transfer or risks of forfeiture (of course, if the stock is then forfeited, there is no corresponding loss deduction to offset the income inclusion). As a result, if we assume that the CEO in your example received $1M worth of stock in Year 1 without having to pay anything to acquire the stock and that the CEO could not sell or otherwise transfer, and that was subject to forfeiture, until Year 4, and if we further assume that the stock has the same FMV of $1M in Year 4, then the CEO would have no income from the stock grant in Year 1 (unless he made a Sec. 83(b) election - most such recipients do). In Year 4, when the stock is both transferable and no longer subject to a substantial risk of forfeiture, the CEO would have $1M in gross income (again, assuming no 83(b) election) which would most likely constitute "wages" for FICA, FUTA and income tax withholding purposes. The CEO's employer would therefore be required to withhold and pay over to Uncle Sugar the FICA, FUTA and income tax withholding amounts attributable to that stock in Year 4. In addition, the employer company would not get a deduction for compensation paid until Year 4. To see some of the other variations, take the following further assumptions to your example: Assume that CEO receives the stock in Year 1 and that, under Sec. 83, the stock is not includable in his income until Year 4, at which time the stock is worth either (a) $2M, or (b) $500k. If CEO does not make a Sec. 83(b) election, then the following occurs: Under alternative (a), above, CEO includes $2M in income as ordinary income in Year 4. Company takes a deduction in Year 4 for compensation paid of $2M (provided that the rules on excessive compensation do not limit the deduction to $1M) and withholds FICA, FUTA and income tax on the $2M (typically, since the CEO is not going to give the money back, the employee withholding amounts would otherwise come out of other amounts the company owes the CEO or, if none exist, the withheld amounts paid by the company out of its own pockets will constitute additional income to the CEO - i.e., the $2M gets grossed up). Under alternative (b), without an 83(b) election, the CEO recognizes $500k of gross income in Year 4 and the company takes a deduction of $500k for compensation paid in Year 4 and withholds (or pays, with a gross up to the CEO) FICA, FUTA and income tax withholding on that amount. If, instead, the CEO makes a valid 83(b) election in Year 1, the following results occur: Under alternative (a), CEO recognizes $1M of gross ordinary income in Year 1 and the company takes a $1M deduction for compensation paid. The company also withholds (or pays, with a gross up) FICA, FUTA and income tax withholding on $1M. In Year 4, when the restrictions on transferability and the risk of forfeiture lapse, the CEO has no further compensation income. In addition, if the CEO then sells the stock for $2M, he has a long-term capital gain of $1M ($2M proceeds, less his basis of $1M - the amount of compensation income recognized on the stock, plus any amounts paid, are the CEO's basis in the stock). Under alternative (b), the same results as above hold in Year 1 and, as a result, CEO takes the stock with a basis of $1M. When CEO sells for $500k in Year 4, he will recognize a long-term capital loss of $500k. Further, if CEO makes an 83(b) election in Year 1, he recognizes $1M of compensation income. However, if he subsequently forfeits the stock in Year 3, he will not get a deduction for that loss. It should be noted that, provided that a pay package consisting of $1 cash and $1M in restricted stock constitutes reasonable compensation for executives of this sort, even if the CEO is the sole shareholder of the corporation and received substantial dividend-type distributions from the corporation on account of his stock, the Service is not likely to assert that the corporation paid inadequate compensation to the CEO and attempt to reclassify the dividend-type distributions as disguised compensation. With respect to poor Joe Taxpayer who owns his own little C corp, if he can show that it was a reasonable business decision to work for only $1 of compensation (e.g., because the corp was a start-up without any current cash income, but with the potential to become quite valuable in later years, thereby increasing the value of Joe's stock), then he may very well be able to sustain his reporting position in the face of an IRS challenge. The problem doesn't typically arise in the context of start-ups or corporations that are cash-poor, but with corporations (C or S) that are doing well, have sufficient cash, and are either retaining cash well in excess of the needs for working capital or are making substantial dividend distributions out to their shareholders. In those instances, unless Joe Taxpayer is being adequately compensated in some manner (e.g., with property the income from which is deferred under Sec. 83 and not accelerated under Sec. 409A), the IRS will often seek to recharacterize dividends received by Joe as disguised compensation income, on the theory that no-one in an arms' length transaction would agree to work for a well-off corporation for nothing, and that therefore at least a portion of the dividend distribution really constitutes remuneration for services performed. In other words, substance over form. << ======================================================= >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2006) - All rights reserved. >> << ======================================================= >>
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That Jobs may be paid a salary of $1 for financial accounting purposes does not necessarily mean that he reports a salary of $1 for income tax purposes. As a general rule, particularly in closely held corporations where the executive are also the principal shareholders, the corporation must pay the executive "reasonable compensation," meaning not too much, not too little, but just the right amount, given the nature of the work done, what an unrelated corporation would pay for that work, and the corporation's financial condition (to give a very brief gloss on the subject). The IRS has pursued closely held corporations and their executives (and won) both on the claim that reported compensation was too low (and that therefore some amount of the "dividends" or other distibutions received as a shareholder were in fact disguised compensation) and on the claim that reported compensation was too high (and that therefore a portion of the reported compensation was in reality a disguised dividend). The end result is that you cannot pay yourself $1 and "get away" with reporting that as your compensation for services rendered unless, under the circumstances, that is a reasonable amount of compensation (e.g., if the company is under water and has no free cash left over after paying its other bills) and in particular, any other distributions you receive from the company are quite likely to be recharacterized as disguised compensation. That, of course, may provide the company with a bigger deduction for officers' compensation than it originally claimed; however, if the statute of limitations hasn't foreclosed filing an amended return, the company may still be estopped from claiming the higher deduction (yes, it can happen). << ======================================================= >> << The foregoing was not intended or written to be used, >> << nor can it used, for the purpose of avoiding penalties >> << that may be imposed upon the taxpayer. >> << >> << The Charter and the Guidelines for submitting posts >> << to this newsgroup as well as our anti-spamming policy >> << are at www.asktax.org. >> << Copyright (2006) - All rights reserved. >> << ======================================================= >>
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Shyster1040 wrote:

It seems logical that if a company makes a lot of money (ie Apple) and the exec takes no salary that it might raise a fica quesion, but my question was if the company makes no money can the executive draw less than the minimum wage, and I think the answer is clearly "yes". i really have no function in the company except to oversee it and to do payroll. I don't want to get hit with paying the 7.5% FICA, which is really a double hit as I get paid by another company well over the FICA limit. The disctinction between an Apple and a mom-and-pop operation seems significant. If there's no money to collect then it doesnt seem worth anyone's effort to try to collect anything. TM
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