We have a similar situation in the United States where S Corps can pay a very low salary to their owner-employers and only that is subject to the 15.3% social security and medicare tax, whereas dividends earned by their Small Corporation are not subject to that payroll tax.
In practice, S Corps pay very low salaries to their owner/employers. (The same is true for members of LLCs.)
But the rules are that the money you earn from your own labor is the amount subject to self-employment tax, and only the amount that is earned due to your wise investment or from the profits you make on your employees (apparently from luck, not good management skills); only THAT amount, the amount earned by an uninvolved partner, only THAT is not subject to self-employment tax.
In practice the only one who ever catches it is the IRS when they audit small corporation returns and reclassify dividends as salary. It's a nightmare of an audit and can ruin a business and a life, so you avoid being egregious enough to pull an audit. In practice I make sure my clients give themselves a salary that they'd hire in an employee at.
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timeasmymeasure
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Date: 2012-07-25 12:47 pm (UTC)In practice, S Corps pay very low salaries to their owner/employers. (The same is true for members of LLCs.)
But the rules are that the money you earn from your own labor is the amount subject to self-employment tax, and only the amount that is earned due to your wise investment or from the profits you make on your employees (apparently from luck, not good management skills); only THAT amount, the amount earned by an uninvolved partner, only THAT is not subject to self-employment tax.
In practice the only one who ever catches it is the IRS when they audit small corporation returns and reclassify dividends as salary. It's a nightmare of an audit and can ruin a business and a life, so you avoid being egregious enough to pull an audit. In practice I make sure my clients give themselves a salary that they'd hire in an employee at.