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.

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- quote -

Do you mean to say it say:
no revenue?!?
or
does not -MAKE A PROFIT- from it's revenue!?

- quote -

You mention PAYROLL, what is this payroll for?

- quote -

This is not relevent, if you are performing a function that
would be compensated for, the taxes are due, no dancing
allowed.

- quote -

If this ENTITY is a client of another closely held,
associated or controlled corporation providing services to
it's parent, funding for those operations should include
appropriate dollars to compensate -YOU- for your service to
this subsidiary.

Granted, in the END the subsidiary may make no PROFIT, but
it is providing services, and your participation is key to
it's operation.

Stop dancing around the issue!

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Shyster1040 wrote:

- quote -

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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Arthur Kamlet <ArtKamlet[at]aol.REMOVE.com> wrote:

- quote -

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

- quote -

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.

- quote -

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

- quote -

Somebody pays it.

Seth

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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).

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Seth Breidbart <sethb[at]panix.com> wrote:
- quote -

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 [at] AOL.com Columbus OH K2PZH

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sethb[at]panix.com (Seth Breidbart) wrote:
- quote -

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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Victor Roberts <xxx[at]lighting-research.com> wrote:

- quote -

Only people who meet certain criteria (managerial,
professional, etc.) can be on salary (technically,
"exempt").

Seth

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"Arnie" <tm4525[at]aol.com> wrote:
- quote -

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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Mike Wellman wrote:

- quote -

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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You could simply have one corp. pay a management fee to the
other.

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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.

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Arnie wrote:

- quote -

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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Arnie <tm4525[at]aol.com> wrote:

- quote -

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" <tm4525[at]aol.com> wrote:

- quote -

No.

--
Vic Roberts
Replace xxx with vdr in e-mail address.

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tm4525[at]aol.com (Arnie) posted:

- quote -

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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"Arnie" <tm4525[at]aol.com> wrote:

- quote -

No

- quote -

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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"Arnie" <tm4525[at]aol.com> wrote

- quote -

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
paulthomascpapc[at]bellsouth.net

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Arnie wrote:

- quote -

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

- quote -

That's the way it works, sorry.

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Arnie wrote:

- quote -

No, you are not exempt from SS witholding by a 2nd employer.
Yes, the employer's portion is lost.

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