Unemployment

Mom & Pop got smart. They decided to form an S-Corporation with the idea of selling organic foods baked at home by Mom, who was at that time a homemaker. Keep in mind that Mom was already at home, taking care of the children and home schooling, while running the household.  Pop had a good job. He was hard working and ambitious.

Pop was an entrepreneur. He was always willing and determined to find new ways to create revenue for his family. The organic foods was a good idea. They started their small business.  They kept books and paid her Federal Social Security (FICA), state unemployment insurance and state workman's accident compensation insurance.

Pop claimed enough dependents so that NO income tax withholding was necessary. They had little money to start with. So how did the Corporation get enough money to pay Mom?

Pop took all of his paycheck each week and bought stock in the corporation. The money that Pop put into the corporation is paid-in capital. The total contributions made by shareholders to a corporation, whether in exchange for stock or otherwise, is paid-in capital.
These contributions are not taxable income to the corporation.   The corporation took the same money that Pop purchased stock with and paid Mom, and of course the various employer/employee insurance contributions required.  Mom in turn, used her earnings to support the household expenses.

Mom could have been paid all or in part by an accrual method, stock, promissory notes or other instruments from the corporation so long as the employer/employee requirements were paid in cash. The effect of this can be to
1) Decrease the investment capital required
2) Conserve cash flow
3) Increase her protection and the amount of benefits payable to her under the various coverages in the event should be eligible for any benefits. (Consider the protection and cash benefits Mom could have from the State Industrial Insurance Workman's Compensation if she were temporarily or permanently disabled on the job.

At the end of the year the corporation had sold only a few items and had no profit. The corporation had spent all of the money Pop had invested The corporation loss predominately amounted to all of the money the corporation had spent in wages paid to Mom. The corporation laid Mom off due to the lack of work. She filed for and collected unemployment benefits to which she was legally entitled and for which the corporation had paid during the period of employment. The end result was the family gained several thousand dollars in legal employment benefits as a result of conducting this activity within the proper corporate structure.

Mom and Pop were also able to deduct the corporate loss (to the extent of their investment) from their other individual earnings and they legally saved on income taxes.  Pop received a refund check.

The corporation became dormant for a year. They kept the company in good standing with the state. The corporation rehired Mom, but regretfully, the same results occurred. But once again the family came out many thousand dollars ahead by the same set ofcircumstances. Mom and Pop prospered.