The Peck Group LC
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Are there tax benefits to taking a pay cut?

On Behalf of | May 3, 2016 | Corporate & Business Tax |

For better or worse, money is at the center of many employment decisions. Overall, the message many people get when it comes to compensation for work is the more, the better.

However, we also know there is such a thing as too much money. In recent years, executives, politicians and other high-profile figures have gotten serious flak for making too much money, according to the public. Now, some people are taking the opposite approach to corporate salaries. Instead of demanding huge paychecks, people like Mark Zuckerberg and the co-founders of Google are volunteering to take a considerable pay cut. 

More specifically, these executives are volunteering to take home a salary of $1 per year.

However, they aren’t exactly taking home nothing. There is a strategy behind this trend of taking a massive pay cut. Zuckerberg, for instance, continues to make money through stock growth and capital gains. These non-cash options allow employers and executives to continue making a healthy living and prioritizing the success of a business without collecting a massive paycheck.

There are also some serious tax benefits for people in Zuckerberg’s position. As discussed in this Forbes article on the subject, his money from capital gains and stock growth are subject to more favorable tax obligations than salary and bonus pay.

However, before you decide to eliminate your own salary as a business owner or executive, it is crucial to understand that this strategy isn’t always going to be in your — or your company’s — best interests.

Tax obligations vary based on factors like actual pay, business expenses, deductions allowed based on business type and whether a company is private, public or closely held. In some cases, choosing to earn $1 can be harmless; in others, it can result in extra taxes.

Before you make any decisions about pay cuts and pursuing non-cash options, it can be crucial that you first examine the tax implications with your attorney. These decisions are enormously complex and one mistake can land in hot water with the IRS.

We insist that your taxpayer rights are protected and your options are known.

Our services are confidential and are protected under the attorney-client privilege as allowed by law.