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Comment by alexlongterm | Hacker News Reader

^^^ this. In fact in the US the IRS will flag abnormally high salaries for small businesses (millions per individual) if no or very few dividends are paid out because income tax is less favorable to the government in the total amount the IRS receives when looking at multi million dollar salaries. Beyond the first $110kish FICA stops making a dent as social security caps out. I'm sure there are possible loopholes for very wealthy individuals but this article doesn't detail them and I'm not familiar with them either. This is the opposite of other places like Sweden where high income tax and low business taxes make dividends very favorable, and the tax authorities there will question paying dividends at too low of income levels.

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People often forget about S-Corps. As the owner you W-2 yourself, then what is "left over" is a dividend. Since an S-Corp is a pass-through entity, you don't pay corporate taxes, and aren't getring the C-Corp double tax on your dividends.

On the dividend, you don't end up paying toward FICA. Effectively saving you up to 15.3%.

IRS rules stipulate you have to be paid a "reasonable" compensation, which most accountants I've talked with define as within 30% of average wage for your "profession".

So the average programmer US wise makes something like 90k I believe (haven't checked in a few years).

You are saying if you ran a 1 man SAAS app and made 200k in a year, you would w2 yourself for 30k and take a 170k dividend?

I am not sure my accountant would like this plan. Taking say that 90k or 100k might be plausible, but 30% of the average wage?

(And at the 90k point.. FICA goes away past 110k anyway, so the savings is fairly minimal)

I think what he means is that your pay must be within 30% of the average wage. So you could likely pay yourself between 63k and 113k if the average wage was 90k.

Actually, the $30k COULD be reasonable if you are at that point only being a marketer.

If you go on indeed or glassdoor, search what ever your main task is, and screen grab that average salary. Keep searching until you find one that works best for you.

Change your salary with each task by being an hourly w2 employee with different charge codes based on the task. Just make sure you track what work you are doing.

(IANAL/A)

More like $60k. But no, your accountant will not go for anything even remotely risky. Accountants are notoriously conservative. No accountant is going to stick their neck out for their average customer.

You have to pay the big bucks for the guys willing to push the envelope. And that's not be ause they are better, it's because they have to make more money to offset the risk to their career.

I'd set up a solo-401k and take 20% of that ($40k) as a profit-sharing retirement plan between the "employer" and "employee". Add in a $18k elective contribution out of your W-2 wages as well. IIRC there's a maximum total contribution of $56k so this doesn't work particularly well past the $180k net profit point or so.

I'm seriously considering moonlighting as a freelancer just to get access to this kind of setup. Of course, my daytime employer not having a 401k makes a big difference - with the combination of the profit-sharing and employee elective contribution, the first $22.5k annually would go directly into a tax-deferred retirement account. Partner up with different people to run unrelated businesses, and you can set up a profit-sharing plan with each to get separate "20% up to $56k/yr" buckets.

Anyhow, I'm kind of rambling. My point is that when you wear both the "employer" and "employee" hat, there's some really good options that open up that most employers don't offer because it's a wealth-transfer from employer to employee.

i went through calculating it. that works only for narrow range of revenue/profits per year. if you max out fica taxes, you are at loss, since s-corp still pays its half of employee taxes. on top of it whole uncertainty of "right" amount of salary and possible audits made me steer away from converting my llc into s-corp.

So while it might work for some - it is not a major "loophole" for top 0.1% (not even for top 1% i think)

It saves me accounting fees for the year ;). It comes out to just under $4k in savings for the year.

Not a major loophole, but its a nice little bonus.

> On the dividend, you don't end up paying toward FICA. Effectively saving you up to 15.3%.

The dividend is taxed at 15% for incomes over $37,950.

That is for a Qualified Dividend. S-Corp Dividends are "ordinary", and are taxed as regular wages minus FICA/Self Employment Tax.

Don't you lose some of the benefits associated with filing as self-employed? E.g., health insurance premium deduction, ability to defer a larger portion of the income into SEP-IRA?

In an S-Corp as a "2% Owner," you are still granted the insurance deduction, but only if no one is qualified for a health plan through their employer.

"A 2-percent shareholder-employee is eligible for an above-the-line deduction in arriving at Adjusted Gross Income (AGI) for amounts paid during the year for medical care premiums if the medical care coverage was established by the S corporation and the shareholder met the other self-employed medical insurance deduction requirements."

https://www.irs.gov/businesses/small-businesses-self-employe...

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