Does funding your corporation with a 401K plan create ROBS salary limits for yourself? Or, are you allowed to pay yourself whatever you want?
ROBS Salary Limits: Reasonable
Many of the ROBS promoters will tell you to pay yourself a “reasonable” salary for your job description. They usually do not explain what that means. Do the ROBS rules require this? You are required to be an employee of your corporation. Since you represent both sides of the employment negotiation, you can give yourself any title or salary you want. However, that does not mean your corporation can afford to pay you what you want.
What if your business is a dry cleaners. You check the pay of three different dry cleaners near you. Most likely, those cleaners are set up as pass through tax entities so the owner is attributed with the income left over after expenses. Dry Cleaner workers might be more than minimum wage but not by much. What is reasonable? What if one dry cleaner creates $3M in annual business and the other one $1M, with roughly equivalent costs? The owner of the first one will make a lot more money.
Your ROBS corporation is a) not a pass through entity, and b) the Plan owns the bulk of the company. SO while the advice from the promoters is standard verbage, it is not helpful. You are an employee, not a majority owner. You did not get into this business to make worker wages. If you want your business to succeed, pay yourself what your corporation can afford. Sometimes that is zero. The ROBS rules do not require you to pay yourself anything at all, and you can pay yourself as much as your company can afford (following, of course, the proper payroll tax rules).
ROBS Salary Limits: Titles
What if you give yourself a great title, such as President? The average salary for Corporate Presidents this year is almost $150k. Sweet! Again, though, that does not mean your corporation can afford to pay you that salary.
I had a client once who gave himself the title of President, started paying himself a Presidential salary, leased a car worthy of a corporate President, purchased a country club membership to meet and take potential clients, and ran out of funds before his company properly launched. This is a bad idea for any ROBS client. A small corporation does not need a President on its payroll. They might need a janitor or someone to answer the phones.
New business owners, whether ROBS created or not, handle 20 – 30 jobs in their companies. Which title do you pick to base a salary? Skip titles. The key is a profitable business. I have another client whose business card reads “chief bottle washer”, essentially meaning he does everything. He is probably the highest paid chief bottle washer in the country. If you want your business to succeed, pay yourself what your corporation can afford, not what you think your title deserves.
ROBS Salary v. Distribution
I often tell people, don’t start a ROBS concept to buy yourself a paycheck. Take a distribution. “But the 10% penalty! The income tax! It’s too expensive!” Compared to what? (love this Al Jarreau song)
If you create a corporation and pay yourself a salary, you owe federal income tax and 15.3% payroll tax. Even with a penalty, a distribution is cheaper. On top of the payroll taxes, you have the expenses of creating your business.
You create a ROBS corporation when you have a business idea that will create a source of income that can continue to pay you again, and again, and again. Then you don’t run out of money in your plan. Years later you sell your business, buy the stock back from the plan at the price at that time (hopefully mucho higher) and voila! You created an awesome income for yourself over time and STILL have your retirement. That is the end goal. To reach this goal, do not pay yourself more than your company can afford.
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