[Dejanh]

Yeah this was the main point emphasized to me on the advantage of an Inc. ....salary to yourslef to avoid excessive taxation, but then again you are in a state friendly to business(similar to NV. you said)
While I am in the Peoples Rebublic of CA. (man I gotta get outta here
I dont know how anyone would live in Cali. , my hats off to ya buddy

[no_worries]

I guess my response would be this. Per IRS guidelines, you must pay yourself a salary which is market rate for you particular occupation. Dejan, how did you arrive at that $1465 figure? If you were audited you would have to justify that amount to the agent. If you ran 80,000 miles a year that would be the equivalent of $.22/mile. My guess is that would be hard to justify as a reasonable wage.

GMAN, I don't believe you can pay yourself dividends in place of a salary if you are an employee. As I stated above, the salary you pay yourself must be a reasonable amount for the occupation. I understand the taxation differences between wages and dividends, I just question whether an average O/O would have much excess left if he paid himself a market wage. Your explanation is exactly why the IRS has such guidelines for wages. Of course you never have to worry unless you're audited.

The most obvious tax benefit of incorporating is being able to fund retirement and health insurance using pretax dollars. As a sole proprietor these expenses are exempt from income tax but not FICA. However, the fees generally charged to set up and administer these programs are often fairly high for a one-person company, at least in the case of 401(k)'s.

I'm not saying that there aren't tax advantages to incorporating. However, I believe that a relatively small number on solo O/O's earn enough to realize those savings.

Pepe, I'm not sure what to tell you as far as common errors that people make regarding compliance. The best advice I can give you is to know the regs. As a CA based carrier, you're going to get to go through a BIT inspection. CA has a reputation for being one of the more thorough when it comes to their audits. Take the time to find out what your files need to include. You have to treat it like you were hiring yourself. That means you need an application, employment history, drug screen, etc. If you pull intrastate you'll have to enroll in the pull-notice program. This is on top of everything you need to maintain for your interstate authority. Remember, as a new entrant you'll likely be subject to more frequent equipment inspections so keep that equipment in good order. Again, all I can tell you is to be prepared. Do your homework and know what will be required of you. It will save you a lot of grief.

[pepe4158]

Thks no worries....yeah I had had no choice but to enroll in BIT...I didnt even want Intra-state authority here(wont ever use it I promise ya), but apparently since I HAVE to be part of Bit, being a California resident(cost me an extra $400)...they seemed to have lumped the two together, I just wana get as quickly and far away from California as I can when I am trying to make some $ running loads. What little time I come home I will sneak over Cajone scales at night, when they are always closed (weekend nights) and leave out Banning which is almost always closed east bound(to avoid as much extra scrutiny as possible). I have no love loss wanting to be here, its just that my godmothers house is here and I use her address.

[GMAN]

Originally Posted by no_worries

I guess my response would be this. Per IRS guidelines, you must pay yourself a salary which is market rate for you particular occupation. Dejan, how did you arrive at that $1465 figure? If you were audited you would have to justify that amount to the agent. If you ran 80,000 miles a year that would be the equivalent of $.22/mile. My guess is that would be hard to justify as a reasonable wage.

GMAN, I don't believe you can pay yourself dividends in place of a salary if you are an employee. As I stated above, the salary you pay yourself must be a reasonable amount for the occupation. I understand the taxation differences between wages and dividends, I just question whether an average O/O would have much excess left if he paid himself a market wage. Your explanation is exactly why the IRS has such guidelines for wages. Of course you never have to worry unless you're audited.

The most obvious tax benefit of incorporating is being able to fund retirement and health insurance using pretax dollars. As a sole proprietor these expenses are exempt from income tax but not FICA. However, the fees generally charged to set up and administer these programs are often fairly high for a one-person company, at least in the case of 401(k)'s.

I'm not saying that there aren't tax advantages to incorporating. However, I believe that a relatively small number on solo O/O's earn enough to realize those savings.

The IRS cannot dictate what you pay yourself when you are in business. I have never heard of any minimum amount the IRS requires you to pay yourself. It is up to you what you want to make. It would probably be best to pay yourself a salary, but as far as I know, there is no law which requires that you pay yourself a salary.

Fees for administrating a 401k will vary from one company to another. There are also some you may be able to get involved through associations, etc., which may help reduce your administrative costs. You may also be able to set up a self directed plan, which may or may not be good for the independent or single truck operation. I am not certain about the self directed 401k. I would check with a professional.

For me, having a corporate structure is a cleaner way in which to do business. You can avoid some tax costs, such as FICA or self employment taxes. Even if you pay yourself a small salary, you can at least reduce your tax bite by paying dividends for some of your net income. If you have doubts, I would check with a tax professional. What works for me may not work for you. Each individual is different.

[no_worries]

GMAN, I hope you don't take any of this as questioning your knowledge on the subject. Like you I'm just trying to disseminate information that I have some knowledge of. By no means do I expect anyone to take what I say as gospel but instead encourage them to double check before making a decision.

Having said that...the IRS cannot dictate what you pay yourself, nor can they set a minimum requirement. However, if you've ever dealt much with how the IRS does business you know that the tax code is mostly guidelines that may be intepreted by the agent. The wording as it pertains to self-employed individuals states that you must pay yourself an amount that is reasonable for your stated occupation. As a corporation you would hire yourself as a driver. Therefore, you must pay yourself a wage which is reasonable for a truckdriver. In an audit, if you showed wages of $10,000 and dividends of $50,000 each year, I guarantee you would be facing heavy scrutiny and likely penalties. As you know, in dealings with the IRS it is always up to the taxpayer to provide proof and justification for everything. So, if Dejan claims a salary of $1465 a month, he would be asked to prove that that is a reasonable salary in the business. I'm not saying that figure wouldn't be accepted. If he shows that salary and there's not much profit left, there probably wouldn't be any problems. However, it's not difficult to spot a tax return in which somebody is obviously trying to shield earnings. That's just what an auditor is looking for.

I do want to stress to people to do their homework when it comes to establishing a retirement plan. Most prepackaged and marketed plans are not in your best interest, especially if you're 10 years or more from retirement. Because 401(k)'s are managed and administered, they often don't include much variety in their offerings. Any tax advantage to contributing to a poorly run program can quickly evaporate due to fees and poor returns resulting from inferior offerings. The same is true in regards to health insurance. Do your homework, know what you're getting into, and when in doubt ask until you're comfortable with your level of knowledge.

Pepe, you don't have to get your intrastate authority. There are a few extra filings, although it sounds like those have been done already. You'll also have to comply with CA's rules governing intrastate carriers, such as quarterly vehicle inspections. However, the extra regs really aren't burdensome and I have to tell you, when things slow down seasonally, some of that intrastate freight actually pays pretty well.

[Dejanh]

No_Worries, it doesnt matter how much you pay as long as you pay, and to avoid those taxes which GMAN is talking about you have to pay some salary, whatever that may be. It does not matter whats the amount that you pay, reasonable or not, they will NOT ASK QUESTIONS in regards to this. Yous company can pay you as 3cpm if you agreed to it :wink: , if youre a bonehead youll accept it and move on. I know of Owner Operators that made more miles than money FOR REAL, this is capitalism remember, not socialism !!!
Its not their job to determine the salary of one individual, thats not their job.Their job is to collect taxes on income recieved and thats that !!!!
Guy that does my taxes has done trucking for over 25years, he has something shy of a 100 coorporations in his files and most of them are single independents. He has the most highest level of education when it comes to accounting and if someone that sharp tells you something you better listen then bank it.....

I do not know how my accountant came to the figure i posted earlier but i will ask him that tommorow !

[no_worries]

I'm not at home so I don't have access to my IRS files, but here is some info dredged from a few sites including qbalance and allbusiness.

Disadvantages of an S Corporation

# Close scrutiny by the IRS of shareholder-employees, who must receive reasonable compensation (subject to employment taxes) before any nonwage distributions may be made to that shareholder-employee.

The last consideration, and most important, is whether your split between wage and distributions seems reasonable to the IRS. Below are a few guidelines of how the IRS determines reasonableness.

Compensation is deductible only to the extent it is reasonable. Compensation paid to employee-shareholders must be paid purely for services, or have a purely compensatory purpose, in order to be deductible

Closely held corporations that have the controlling shareholders and their families setting their own compensation figures will be more closely scrutinized under an audit.

Other factors determining reasonableness include: These are important and your position should be defined before determining your gross wage.

* the employee's qualifications and role in the company, including factors such as hours worked the employee's position, duties performed, and his overall contributions to the company
* the character and condition of the company, including factors such as the size of the company, the complexity of its business and the general economic conditions
* a comparison of the employee's compensation with the compensation paid by similar companies for comparable services
* ability and achievements of the employee (would an outside investor have paid the compensation amount based on performance);
* volume of business handled by the employee;
* complexities of the business;
* relationship of compensation to gross and net income of the business;
* living conditions in locality;
* the salary policy of the company for all its employees and the particular employee's salary history with the company

The issue of reasonable compensation is an easy IRS target and a large revenue generator for the IRS. Consider contacting a local employment agency, provide them with a list of your management responsibilities and hours worked and have them put into writing what it would cost to hire a person to fill your shoes and keep this paper in the same file where you keep a copy of your tax returns.

Again, I'm not saying that anybody is doing anything wrong. All I'm saying is that it is incorrect to assume that you can pay yourself any amount you like in order to collect the rest as dividends or distributions in order to pay less FICA. Chances are the average O/O won't make enough off of one truck to realize much tax benefit from incorporating. That doesn't mean it's the wrong move.

[pepe4158]

Yeah no W...I am coming to the conclusion its npot worth it for my one pony show to Inc...especialy since the socialist government here charges 800 to start, n the rest on a sliding scale of what you earn

N oh yeah Dej...I am in a socialist government (definitly not capitilist, Arnold tryed that n the press here crucified him)....California

[no_worries]

I don't know, Socialism usually implies high taxes. I paid about $250 in income tax to CA last year. I'm not complaining :lol:

[sidman82]

I have to agree with Gman, I do the same. (S-corp) I draw a very small salary. My accountant also said it does not matter what I take.
(Extra) Will be paid to me in dividends.
I am also saving on double taxation on Social Security tax as well.
An S-corp is actually less likey to be audited then other corps.
The small salary helps to pay less federal income, and state income tax also.
I have enough expenses to show, to pay very little to no tax on my corporate return. There are a lot of things to write off.
These are a few of the reasons to become an S-corp.