Ask HN: How do I manage the profit of a successful website?

There are businesses dedicated to assisting S-corp owners in determining reasonable compensation. While $54,000 is not a ridiculously low number, there is no "magic number" that makes the IRS happy. Remember, you are working for the corporation. The requirement is for a reasonable salary, based on the work performed and local market conditions. What would it cost to hire someone else to do the same work?

In addition the OP is using a throwaway account. And nothing in their bio. So i assume they want privacy.

However if anyone is curious about other people making this much per month and what they are doing check out the indiehackers website.

Other replies said it, but to put it more clearly:

Is "any money the company makes past $54,000 annually is tax free?" Not even close!

You have to pay income tax (federal, possibly state) on _all_ the money you make. That's very important. Like, "at best a fine, at worst jail time" important.

I was a solo S-Corp for three years and had to learn all this stuff. Here's a breakdown:

Payroll taxes (federal) are taken only out of your salary. If you work for a business as a W2 employee--hourly or exempt--you pay half your payroll taxes, and the business pays half your payroll taxes. The 15% total in payroll taxes (SS, Medicare, FICA) is 7.5% paid by you, and 7.5% paid by the business on top of the salary they are paying you.

So, for example, if your salary is $50,000 per year, you will have $3,750 deducted from your paycheck for payroll taxes and your employer is responsible for an additional $3,750 on top of that. Disregarding income tax, taking a $50,000 salary means getting paid $46,250. But to pay you that $46,250, it costs the business $53,750.

All well and good if you and the business are different people. It wasn't your money to begin with. But if you are the employer and the employee, which is the case for solo S-Corp structures like this, then the whole 15% is coming out of your pocket.

Let's say your business earns $120,000 a year and you decide to pay yourself a $100,000 salary. That costs $107,500 (gross) and you keep $92,500 (net). If you decided to pay yourself a $54,000 salary instead, that costs $58,050 and you keep $49,950. Your profit is ($120,000 - the cost of your salary) and your total earnings are net salary + profit.

In the first case, (120,000 - 107,500) + 92,500 = $105,000. Congrats, you made $105,000! That's a lot of money. Now you pay income taxes on it.

In the second case, (120,000 - 58,050) + 49,950 = $111,900. Congrats, you made $111,900!

Thus, you took home $6,900 more this year because you paid yourself a lower salary, all due to payroll taxes.

---

What's the catch? Why not pay yourself $1 a year and increase your stacks?

The IRS has a rule for S-Corporation employees that says they must be paid a "reasonable salary" (https://www.irs.gov/pub/irs-news/fs-08-25.pdf). Ultimately they get to decide if you are taking as a payroll-taxable salary is "reasonable".

The way I had it explained to me is that I would need to be able to testify before a judge that whatever salary I picked is "reasonable" (not necessarily market rate) for a person with my skills in my location. $1 a year isn't even minimum wage, so that's out. Minimum wage is out because I can't argue with a straight face that the local minimum wage is a "reasonable salary" for a software developer. So it's up to each individual S-Corp owner to pick a number that they could argue is a "reasonable salary". In this case, $54,000 is probably safe because the IRS has bigger fish to fry.

As in all matters of legal and financial decision making: talk to your lawyer, talk to your accountant, don't talk to cops.

> I'm talking about having your company own a subsidiary in Ireland that owns trademarks your company licenses from them for, conveniently, 100% of your profits, which then moves their profits to the Netherlands, which then lets them move to a Dutch Caribbean island which then takes advantage of Caribbean solidarity laws to move it to the Caymans where yet another company that did no work takes the money and pays the 0% taxes there.

Name ONE company that isn't a criminal organization that does this. Just one.

I can imagine a lot of things. Just because I do, it doesn't mean that thing is real.

> I'm also talking about loopholes like allowing individuals to take loans secured by appreciated assets to avoid having to sell those assets until death, when the estate will instantly adjust to market value.

You are kidding, right?

Every homeowner in the US has an appreciating asset. Their home. And massive numbers of them take out loans secured by that asset in the form of second mortgages or cash-out refinancing. And none of them pay for the value their asset gained. When they die, and their estate is handed to their heirs, the tax treatment is exactly the same for everyone.

The other part you left out of your comment is that the loans still have to be paid after death, of course. So, if you leverage 100% of the appreciated value the heir is left with nothing. This is, quite literally, the mechanism in place for every single home in the US.

This loss of tax revenue (if the term applies to billionaires, it has to apply to everyone) dwarfs, in real dollars, what any one group of wealthy people could derive as a benefit through the same mechanism.

If you don't like it, go talk to your representatives to have them change tax laws as they pertain to real estate. Let's see how far you get.

> I said they were morally wrong loopholes. And I stand by it.

Oh, please. These are not loopholes.

Dictionary definition:

"an ambiguity or omission in the text through which the intent of a statute, contract, or obligation may be evaded"

A loophole would be something like discovering that because you have N+1 dollars you get to deduct at a rate twice that of everyone else because nobody imagined that anyone could have N+1 dollars when they write the code.

There is no ambiguity or omission when it comes to the tax treatment of real estate used as colateral for loans. This is the law, very clearly and completely stated and, quite literally, as I said, applying equally to every single homeowner or real estate owner in the US, billionaires included.

If you want to be angry, I'll point you to a very real loophole that is costing US taxpayers more than anything you can imagine billionaires might be doing.

The Universal Postal Union agreement of 1874 setup a situation whereby China, and others, could ship packages of 2 kg or less from China to anywhere in the US for a lot less than it would cost someone in the US to ship within country. For example, a Chinese manufacturer can ship a t-shirt from anywhere in China to anywhere in the US for $1 to $2 or less. It would cost a US manufacturer $7 to $10 or more to ship that same t-shirt within the US. Think about that for a moment.

Imagine wanting to manufacture and sell t-shirts in the US. You are done before you even made your first t-shirt. The only way you can be in that business is to get them made in China and have them shipped from China to your customers. Entire industries have gone "poof" because of this alone. Which, of course, means the untold numbers of jobs they supported have gone "poof!" as well.

This is how Chinese vendors on eBay, Amazon and elsewhere are able to provide free shipping. Those of us who manufacture goods in the US cannot possibly compete with this without raising prices and eating into profits, both of which weaken us over time and damage our ability to compete. The more likely scenario is that US-based manufacturers shift shift towards industries that are harder to export (aerospace) or fire everyone in manufacturing and run a hybrid US-designed/Made in China operation.

This agreement, signed over 140 years ago, was intended to help poor and developing nations (imagine China 140+ years ago) access other markets. Fair and just cause, of course. And yet, they did not think of adding some sort of a clause that would trigger if, say, for example, China became the second largest economy of the world. And so, China has been shipping product for nothing to the US, Europe and elsewhere for decades, absolutely destroying local competitors just on that basis.

That is probably the best example of a real loophole (ambiguity or omission) I can offer. One that we must fix, yet the political will to do so does not seem to exist. Trump tried to exit the agreement. Politicians used it to, once again, label him all kinds of nasty things. They ended-up making some adjustments. Not enough, we are still in it. US and European manufacturers cannot compete in their own region against goods shipped from China. Brilliant.

>> I'm talking about having your company own a subsidiary in Ireland that owns trademarks your company licenses from them for, conveniently, 100% of your profits, which then moves their profits to the Netherlands, which then lets them move to a Dutch Caribbean island which then takes advantage of Caribbean solidarity laws to move it to the Caymans where yet another company that did no work takes the money and pays the 0% taxes there.

> Name ONE company that isn't a criminal organization that does this. Just one.

The Double Irish Dutch Sandwich? Apple, Google and Facebook all spring to mind, and I'd bet that MSFT, AMZN and others did as well. I may have missed a few details, but FB hired Google accountants to implement the same scheme for them.

> Every homeowner in the US has an appreciating asset. Their home. And massive numbers of them take out loans secured by that asset in the form of second mortgages or cash-out refinancing. And none of them pay for the value their asset gained.

Yes, they do. And I think they should have to realize the capital gains on their house when they use the higher asset value as collateral on a loan. Not that it would matter because, as a matter of tax policy, US homeowners pay no[1] capital gains taxes on their primary residence.

[1] The first $500,000 of capital gains on your primary residence isn't taxed, and therefore it is trivial to pay no taxes for the vast majority of Americans.

> When they die, and their estate is handed to their heirs, the tax treatment is exactly the same for everyone... The other part you left out of your comment is that the loans still have to be paid after death, of course. So, if you leverage 100% of the appreciated value the heir is left with nothin

Normally if you spend 100% of the appreciated asset, you find yourself in the hole because you owe taxes. If you borrow 80-85% of the appreciation (and 100% of the basis) you can sell the asset, settle with the IRS and your creditors and be left with nothing. If you die, your estate will sell the asset, pay no tax (because it instantly rebases on death), and your heirs get the 15-20% that would go to the IRS.

> If you don't like it, go talk to your representatives to have them change tax laws as they pertain to real estate. Let's see how far you get.

You're the one attempting to shift from discussing asset appreciation to real estate appreciation. I doubt Bezos or Musk is refinancing their mansion as opposed to using their billions of highly liquid stock as collateral.

> an ambiguity or omission in the text through which the intent of a statute, contract, or obligation may be evaded"

Yes. I'm talking about how rich people can access their capital gains without paying capital gains tax. The "borrow money against stocks and never repay it during your lifetime" has the omission of language preventing it and is allowing an obligation (paying taxes) to be evaded.

>they did not think of adding some sort of a clause that would trigger if, say, for example, China became the second largest economy of the world.

There is a clause, it was invoked, and mail rates will be going up over the next 5 years. But that's, by your definition, not a loophole. Nor is it strictly relevent to tax loopholes if it were. Because there can in fact be two wrong things with the world, and we have the ability to fix more than one at a time.

And, even if we couldn't, I'd say that subsidizing Chinese industry is bad, but the end results of US companies shipping profits overseas is far more dangerous to the US economy.