Hacker News Reader

Comment by stirno | Hacker News Reader

This isn't necessarily true. Its fairly common to have an S-Corp (or LLC filing as S-Corp) dodge a significant chunk of the self-employment tax by paying a lower salary and then shareholder distributions for the rest.

Balance is important here as the IRS watches these situations closely, but any decent accountant should help someone down this path.

View on HN

On top of this, if you are making any significant amount of money as a self-employed individual you should probably look into setting up a solo-401k or a SEP-IRA, which will help reduce your taxable income (by up to $51,000 for 2013).

After looking into this, it looks like the IRS will ding you if you pay yourself less than what it would take to hire someone to do the same job.

The IRS will, effectively, value your job in the event of an audit and determine whether you paid yourself reasonably compared to your market for your skills, experience, etc.

I had prepared an example that showed you could actually pay less in FICA, while still being reasonable in the eyes of the IRS. Maybe not ideal to post it here though.

How do those CEOs with $1 salaries get the all clear? Their compensation is all capital gains, yeah?

Long term capital gains is less than the alternative minimum tax. Executive compensation probably consists of a mixture between stock options and company paid expenses (airfare, company car, vacations, travel, nice office equipment, etc).

Maybe the IRS determines that's the market rate for their skills :P

If the majority of CEOs do this, then that is the typical compensation of CEOs. So they get away with it because they all do it.

I believe this only applies to S-corps, in order to prevent abuse of the pass-through taxation S-corps enjoy. IANAA though.

Reply on news.ycombinator.com