Tax-Smart Billionaires Who Work For $1

Apr 5 2014, 8:50am CDT | by

Tax-Smart Billionaires Who Work For $1
Photo Credit: Forbes Auto

Minimum wage is going up, but big-time CEO pay seems to be going the other direction. Not overall pay necessarily, but salary. In fact, it’s increasingly common for common-man honchos to volunteer for a nominal $1 salary. And they may not want a cash bonus, either.

Stock growth and capital gain is a lot more attractive and is taxed much more favorably. Besides, offering to work for a pittance can be a shrewd move. It shows current and prospective shareholders what you’re about.

In 2012, Mark Zuckerberg earned $770,000 in salary and bonus, but now the CEO is Facebook’s lowest-paid employee. That’s right, now Facebook’s Mark Zuckerberg is among billionaire CEOs earning a $1 salary. Of course, he’s worth $27.8 billion, so he could afford to request an annual wage of $1 in 2013.

One dollar pay suggests that a CEO is really looking out for shareholders. Rather than drawing large amounts of cash, taking a big equity stake and virtually no cash looks egalitarian. It also makes the CEO focused on growing the company’s stock.

That’s one reason it’s become popular. Mr. Zuckerberg isn’t the only one doing it. Google’s Sergey Brin and Larry Page each earn a $1 salary. So does Hewlett-Packard’s Meg Whitman (net worth $2 billion) and even Oracle’s Larry Ellison (net worth $51.5 billion).

But the H-P and Oracle honchos nevertheless earn significant compensation from their companies. Whitman earned $17.6 million in stock and other performance-based awards in 2013. Ellison was paid $79.6 million almost entirely in stock options. Compensation tied to performance is one thing, and can be a good deal for both company and exec.

Some elected officials have taken the $1 challenge, including former Mayor Bloomberg and former Governor Schwartzenegger and former Governor Mitt Romney. And some famous past examples included Chrysler’s Lee Iacocca and Steve Jobs. A few other $1 execs, include:

But is there any tax game here? Yes and no. Long before the huge executive pay packages of the last few decades, the IRS labeled some pay unreasonable and levied extra taxes as a result. Usually that’s pay that is too big, so can’t be deducted on the company’s taxes.

In fact, now most public companies face a limit on pay deductions of $1 million per employee unless the pay is performance based. But with closely held companies, the unreasonable compensation tax problem remains. How much pay is too much for a privately held company to deduct is fact specific.

Conversely, these days the IRS sometimes attacks pay for being too low. Once again, the IRS tries to impose extra taxes as a result. Why would the IRS care if you pay too little? Whether the IRS stands to collect more by arguing that pay is too low or too high turns primarily on the type of business entity paying the compensation.

A C corporation deducts pay as a business expense, so the IRS wants to argue pay is too high and can’t be deducted. But in an S corporation, there are smaller taxes to the owners by paying amounts out as “dividends” not as pay. After all, income taxes apply in any case, and the rates on dividends can be better than pay. What’s more, the payroll taxes on compensation are shared by the employer and the employee. That means each side is paying more tax.

Famous examples of this S corporation tax dodge involved John Edwards and Newt Gingrich. But there’s little to suggest it is illegal. It is simply a question of degree. Many of the tax cases in which people are found to pay too little compensation involve extreme facts, as where someone claims to be working for nothing.

And that brings us back to Mr. Zuckerberg and his ilk. Does the same rationale apply to them? It is hard to see how, since these are public companies, not closely held. And that’s especially true with people like Mr. Zuckerberg and the Google twins Brin and Page. These founders don’t need lots of options and restricted stock.

Where an executive takes $1 cash compensation plus considerable non-cash compensation like options and stock, one could argue there’s an abuse depending on exactly what’s awarded and exactly how the plan is implemented. Even so, most equity in this context is subject to tax as wages.

As a result, it’s hard to see that there’s much for the IRS to go after. Of course, that doesn’t always stop the IRS….

You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

IPad Air Giveaway 2014 is Online
IPad Air Giveaway 2014 is Online
Our sister site I4U News is giving away a brand new iPad Air or if you can wait an iPad Air 2. This is an $499 value.
 
 
Your Parent Or Kid Moved In: Are You Covered?
A record 57 million Americans now live in multigenerational family households — double the number in 1980, according to a new Pew Research Center study. And I bet many of them have the wrong homeowner’s or renters...
 
 
Pandora Looks to Challenge Terrestrial Radio's Dominance in Cars
Pandora Media is one of the largest Internet radio providers in the U.S. with more than 75 million active users. While the company’s active user count has increased at a robust pace historically, it is likely to slow...
 
 
Are General Manager Salaries About To Skyrocket? Will There Be A Front Office Salary Cap?
Are General Manager Salaries About To Skyrocket? Will There Be A Front Office Salary Cap?
It’s January 2026. New York Yankees owner Hal Steinbrenner gets out of his driverless car and triumphantly marches before the gathered press to introduce his prized new free agent. It’s a record-breaking contract—over...
 
 
 

Latest from the Network

Keira Knightley was 'a goody two-shoes'
Keira Knightley was ''a goody two-shoes'' when she was younger. The 29-year-old actress claims she was a ''boring'' well-behaved child and never skipped school because she didn't want to upset her parents or teachers....
Read more on Celebrity Balla
 
Kat Dennings is in love with Kim Kardashian
Kat Dennings thinks Kim Kardashian's butt is ''amazing.'' The '2 Broke Girls' actress was ''very nervous'' when the 'Keeping Up with the Kardashians' star filmed a cameo for the show's 80th episode and was too shy to...
Read more on Celebrity Balla
 
Taylor Swift doesn't 'need some guy' for inspiration
Taylor Swift is ''figuring out how to cope'' with life on her own. The 'Shake It Off' hitmaker hopes her upcoming album, '1989,' will prove she doesn't ''need some guy'' to help her ''make a great record'' or to feel...
Read more on Celebrity Balla
 
Sarah Hyland is 'great'
Sarah Hyland says she is ''great'' after obtaining a restraining order against her ex-boyfriend. The 'Modern Family' star is happy to be focusing on her career again after a judge recently granted her a three-year...
Read more on Celebrity Balla
 
India re-elected to UNHRC for two years
United Nations, Oct 21 (IANS) India was Tuesday re-elected to the United Nations Human Rights Council (UNHRC) for the term 2015-2017 in a keenly contested election in the UN General Assembly in New York. Other...
Read more on Politics Balla
 
Spanish nurse cured of Ebola
Madrid, Oct 21 (Xinhua) Spanish nursing auxiliary Teresa Romero was pronounced cured of the Ebola virus disease according to World Health Organisation (WHO) guidelines after the results of a second test confirmed...
Read more on Business Balla
 
Gurdwara closed in Belgium
Brussels, Oct 21 (IANS) The mayor of the town of Vilvoorde in Belgium, Hans Bonte, has ordered the closure of the local gurdwara, Guru Nanak Sahib, for one month. Belgian media Tuesday charged that the Sikh temple "...
Read more on Politics Balla
 
Air strikes kill 28 militants in Pakistan
Islamabad, Oct 21 (IANS) At least 28 militants were killed when the Pakistani army launched an air strike in the country's northwest tribal town of Datta Khel Tuesday, military said. In a statement, Inter Services...
Read more on Politics Balla
 
Report reveals large-scale torture in China's 'Black Jails'
Beijing, Oct 21 (IANS/EFE) The use of hotels and factories as clandestine prisons where thousands of people -- mostly women -- are tortured to prevent their complaints against the government from coming to light has...
Read more on Politics Balla
 
Clinical trials of Ebola vaccine start Nov 1 in Switzerland
Geneva, Oct 21 (IANS/EFE) The World Health Organisation (WHO) announced Tuesday that it will begin clinical trials Nov 1 in Switzerland of one of the two anti-Ebola vaccines currently under development. WHO Assistant...
Read more on Business Balla