Preserve future Scorp Dist while taking hourly wages?

[smbizowner]

My wife and I purchased a business in 2012, and didn't take a salary, but paid part of our loans to the business from earnings so we ended up with only claiming a few hundred dollars. In 2013, we moved our store to another shopping center and lent much more money to the business, and continued the same paying our loans payback. (Alot of the money used was borrowed from family, and we are paying it back quickly and using some to live on)

I thought we would be able to refinance my home mortgage in the Spring of 2014 (having owned the business for 2 years) , but a broker said we had to have taxable income and that all the loans paid would not count towards what I needed to refinance so.............

In 2014 I'm thinking of paying myself and my wife hourly wages, since we do work there alot to keep our costs low, so we have the taxable income. My wife and I do everything in the business, and work more hours than we can take as salary, but again we need taxable income. Our business is growing nicely since moving the store.

If we pay ourselves hourly for the next couple years, will we still be able to then pay ourselves a lower salary later when the business is doing better and take a distribution? We will be working much less hours, and more managing the store, Quickbooks etc.

Comments, suggestions, ideas?????

Thanks
Frank
smbizowner

[Freelancier]

Why not just pay yourself a fixed monthly salary? There's no magic difference between being paid hourly vs. salary when you own the company... except that you wouldn't have to keep track of the hours or adjust your rate to fit what you wanted to be paid.

And don't take so much as part of your salary, because you can take dividends without paying payroll taxes on them, so that's lower-taxed income.

[smbizowner]

Why not just pay yourself a fixed monthly salary? There's no magic difference between being paid hourly vs. salary when you own the company... except that you wouldn't have to keep track of the hours or adjust your rate to fit what you wanted to be paid.

And don't take so much as part of your salary, because you can take dividends without paying payroll taxes on them, so that's lower-taxed income.

The business is growing and cyclical and I didnt think I could adjust my salary monthly. Also I was thinking hourly instead of salary, because after a couple years I didn't know how it would look to the IRS to lower my salary when I was just managing the company so we could benefit from the dividends.

We work alot of hours and to use the dividends we would presumably have to justify how much we are paid. If the hourly wage was too low. we probably wouldn't be allowed the dividends.

Also I'm not sure the dividends be considered income for the refi.

smbizowner

[Freelancier]

Yes, you can adjust your salary monthly if you want. Just make sure you keep up with the right levels of tax withholdings for income and payroll taxes.

As for whether dividends are considered income: you betcha it is... provided they're on your Federal tax return. If you're running your own business, they'll usually average your previous 2 years of tax return adjusted gross income to figure your personal income.