Appropriate salary for a company director

mambo

If I set up a private limited company, with myself and my wife as directors, and I do all the actual work and my wife does no more than the minimum required as a director, what is the MOST she can reasonably be paid for that role?

As she is not currently earning a salary, the more the better from a tax point of view, as it would reduce our overall tax bill under joint assessment.

But presumably anything over a certain amount might cause issues with Revenue (e.g. paying her 50% and me 50%!).

marizpan

If she is a director (under s class prsi, greater than 15% or mgt) then she isn't entitled to paye credits. so I don't see the advantage if you both are jointly accessed. She could earn under10k tax free in another job where she would qualify for paye credits.
Revenue wouldn't care what you were paying her as long as they can tax it. Since ye are the directors and shareholders, it is your choice as long as the company can afford it.

Bobby1984

If you are looking to take out €60,000 for the year in total, it would be most advantageous to pay her €23,800 when you are jointly assessed and you get €36,200. If you want to more than this, it doesnt really matter who gets it as you will pay the same amount of tax anyway.

As long as you can argue that this is reasonable, I doubt Revenue would have any argument.

You may only have a problem if you paid yourselves a totally unreasonable amount and the company went into liquidation.

mambo

Bobby1984 wrote: »

If you are looking to take out €60,000 for the year in total, it would be most advantageous to pay her €23,800 when you are jointly assessed and you get €36,200. If you want to more than this, it doesnt really matter who gets it as you will pay the same amount of tax anyway.

As long as you can argue that this is reasonable, I doubt Revenue would have any argument.

What arguments might one use to say a directors fee is "reasonable"?
If my wife is doing none of the actual day-to-day work, just acting as a director, would paying her 10% of the company's income be reasonable? Would 20% be pushing it?

dbran

Hi

The level of directors salaries are decided by the shareholders of the company meeting at the AGM and not necessarily by market conditions.

If the revenue was to question such a thing it would be a very grey area indeed unless clearly she was not performing any work for the company whatsoever.

dbran

mambo

To put it another way, if she was doing:

* light bookkeeping (e.g. under an hour a month)
* providing financial advice here and there (she has a degree in Business & Finance)
* acting as a director, with no day-to-day work involved, but with the general responsibilities of a director (attend AGM, oversee that the company is run properly, etc.)

and the company had a turnover of 100k, would paying her say 10k/year be liable to cause problems with Revenue?

berlingo

I know directors of small firms being paid minimum wage for hours worked. However she could be paid a dividend from profits after tax at year end inline with her share value.

Legend100

berlingo wrote: »

I know directors of small firms being paid minimum wage for hours worked. However she could be paid a dividend from profits after tax at year end inline with her share value.

Very inefficient to do this for tax purposes as dividends are out of after tax profits thereby double tax hit

On this topic - I had a client a few years back where the Revenue argued in a revenue audit that the wife's income was excessive as a company director and said she could only earn max xxx euro (can't remember the figure exactly)

We asked the Revenue to outline anywhere in the tax legislation where they could try and enforce such an argument (certainly don't believe this could be an 811 issue). i left my job before the end of that audit so not sure what the Revenue's response was - anyone else ever have this put to them in a Revenue audit?

berlingo

I completely agree Legend. He could look at profits before tax on his management accounts and pay out a performance bonus every quarter. As a new company his turnover should be under the threshold to avail of the start up scheme, so any profits should be free from corporation tax for a maximum of 3 years anyway but he can seek paid advice on this.

Pandoras Twist

Isn't there case law on reasonable salary payments? Something about a company who paid the daughter and son of the owner an excessive amount when it was found they didn't really do anything of benefit, minor book-keeping and some sales calls. The payments were disallowed as not being wholly and exclusively for the purposes of the trade and possibly deemed to be distributions instead?

Sorry, my foggy memory can't think of any more detail than that. I think it may have been an old enough case though.

dbran

Hi

I have never come across a situation whereby the wife of a director (who was also a director) was paid a salary for work they had done and this wage was subsequently challenged by the revenue. This salary being visibly put through the PAYE system, a payment drawn monthly for the net salary and another monthly payment made to revenue for the relevant tax.

If the revenue were to challenge it, I believe that they would be on extremely shakey ground. They would have to properly prove what had or had not been done. Given that the work of a director can be a very hard thing to pin down and value, this would mean a lot of work for very little additional tax.

The revenue have very substantial powers and antiavoidence legislation such as sect 811 etc. Nevertheless there is nothing in the tax code that stops a person drawing a salary for work that they have done. Just because it is paid in a tax efficient manner does not make it dis-allowable. Certainly not in a situation where a guy is earning €50k and wants to put through €20k through his wife and make use of her lower rate band.

However, this is provided that the PAYE system is operated correctly and transparently throughout the period and a visable payment of the wage is made out of the bank each period. It really cant be just added to the P35 at the end of the year. If it is then the revenue are more likely to question it or they may not.

I once had a situation where the husband and wife had become estranged and were no longer talking to each other. She had even emigrated but still received a monthly wage which was visibly paid out through the bank account. It was never even brought up at the revenue inspection.

On the other hand I heard of an occasion where the director had decided to put through each of their four children (the oldest of which was 6 years old) for €9k each. That was definitely questioned.



dbran

Legend100

dbran wrote: »

Hi

I have never come across a situation whereby the wife of a director (who was also a director) was paid a salary for work they had done and this wage was subsequently challenged by the revenue. This salary being visibly put through the PAYE system, a payment drawn monthly for the net salary and another monthly payment made to revenue for the relevant tax.

If the revenue were to challenge it, I believe that they would be on extremely shakey ground. They would have to properly prove what had or had not been done. Given that the work of a director can be a very hard thing to pin down and value, this would mean a lot of work for very little additional tax.

The revenue have very substantial powers and antiavoidence legislation such as sect 811 etc. Nevertheless there is nothing in the tax code that stops a person drawing a salary for work that they have done. Just because it is paid in a tax efficient manner does not make it dis-allowable. Certainly not in a situation where a guy is earning €50k and wants to put through €20k through his wife and make use of her lower rate band.

However, this is provided that the PAYE system is operated correctly and transparently throughout the period and a visable payment of the wage is made out of the bank each period. It really cant be just added to the P35 at the end of the year. If it is then the revenue are more likely to question it or they may not.

I once had a situation where the husband and wife had become estranged and were no longer talking to each other. She had even emigrated but still received a monthly wage which was visibly paid out through the bank account. It was never even brought up at the revenue inspection.

On the other hand I heard of an occasion where the director had decided to put through each of their four children (the oldest of which was 6 years old) for €9k each. That was definitely questioned.



dbran

The director's wife (also a director) in the audit I was doing was employed as an administrator (taking calls, book keeping, akin to a secretary I guess) and the Revenue said in their initial meeting "this type of job would merit xxx euro" - (still cant remember the amount but it was more than likely around the 15-20k mark)

I know salaries can have market rates but I personally thought it was a bit cheeky from the Revenue to take this line. How one chooses to remunerate the employee should be at the discretion of the employer, not the Revenue. Looking back, it would have been interesting to know how that audit concluded. We were fairly confident at the time that the Revenue did not have grounds for their argument.

@Pandora - yes I remember the case law you were describing but from memory, the point of law in question there was taking a deduction when the employee had no function within the business (children still at college who have no input in the business but still being put through the books)

might have a look to see if I can find the case I'm thinking of :rolleyes: