Tell me more ×
Answers OnStartups is a question and answer site for entrepreneurs looking to start or run a new business. It's 100% free, no registration required.
up vote 1 down vote favorite
2

I've looked around, but can't seem to find a straightforward answer for this.

I am one of 4 founders in a start-up incorporated as a C-corp. 2 of us work full-time on the start-up, and so far have not been taking any pay, but we would like to start.

What's the way to do it?

Since we are only going to be able to pay ourselves randomly depending on cash-flow, and most definitely below minimum wage, doing payroll and W2's doesn't seem to make sense.

But on the other hand, I keep reading that officers of a corporation should not be classified as contractors.

Is it okay to pay ourselves as contractors while being officers or should we be doing payroll, in which case, we would not meet minimum wage requirements?

share|improve this question
I'll point to Joel Spolsky's answer here: Forming a new software startup, how do I allocate ownership fairly? – Atul Goyal Sep 8 '11 at 13:08

4 Answers

up vote 2 down vote

I keep reading that officers of a corporation should not be classified as contractors.

That's good advice.

What's the way to do it?

distributions through equity (i.e. dividends)

share|improve this answer
wouldn't all shareholders would have to get dividends? We want to pay just two shareholders. Also, can we distribute dividends when we are making losses overall? – sid Sep 8 '11 at 16:57
I'm not aware of a legal limitation to when you issue dividends but any company that is making a loss and issuing dividends raises a red flag for potential investors. You still have double-taxation on dividends to worry about. – John Sep 10 '11 at 7:13
up vote 1 down vote

I know some founders in similar situations - and most of them pay themselves as contractors. This is not strictly correct - but it is MUCH cheaper and simpler (in terms of paperwork, payroll services, payroll taxes, etc) than paying yourself as an employee.

Your risk profile from this is pretty low, especially if the company files a 1099 for payments to you - that 1099 will cause you to have to pay self employment taxes on that income. Thus, the government is receiving taxes on your compensation, just not the same amount as if you were paid a salary. So, in the highly-unlikely scenario that you get audited, you can rightly claim that you were paying taxes - just not the "correct" ones.

share|improve this answer
up vote 1 down vote

You should be paying yourself via payroll.

From IRS document "Paying Yourself":

An officer of a corporation is generally an employee...

and

You cannot designate a worker, including yourself, as an employee or independent contractor solely by the issuance of Form W-2 or Form 1099-MISC. It does not matter whether the person works full time or part time. You use Form 1099-MISC, Miscellaneous Income (PDF) to report payments to others who are not your employees. You use Form W-2 to report wages, car allowance, and other compensation for employees.

If you were an LLC, you would have different rules.

share|improve this answer
up vote 0 down vote

When you do accrual accounting (what you should be doing as a company), what you are paid (seen as an expense to the company) is not the same as what you receive (what you get in your bank account. You can pay yourself a normal salary and calk it up to 'salaries payable' for the future then pay out of that payables account as cash allows. This should not cause a problem with minimum wage laws since you are getting paid, just in debt instead of cash.

Another idea is dividends, as lrobb wrote but then you have double taxation, which you would generally want to avoid.

share|improve this answer
Debt is actually something I had not thought about, it's an interesting idea, but it doesn't seem clean adding debt to my balance sheet. – sid Sep 8 '11 at 16:49
Also the fact that we would be paying payroll taxes on the full amount doesn't make it a great option. – sid Sep 8 '11 at 17:16
Hmmm, it's an interesting point. I'm not sure you would have to pay payroll taxes on unpaid salaries. That is, you might not have to pay payroll taxes until you actually transfer the pay to the employee. – John Sep 10 '11 at 7:14

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.