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Strategies & Market Trends : ahhaha's ahs

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To: Mark Adams who wrote (3210)	10/19/2001 1:11:39 PM
From: GraceZ	Read Replies (1) of 24758

However, if they incorporate, they will be subject to no income or fica tax at all, unless they choose to distribute income. Income distributed will be passive rather than ordinary, so incorporating with a zero tax corporate rate will allow them to avoid the 15%+ FICA tax. If you have a sole proprietorship you can't just incorporate and pay yourself zero salary and take passive income in the form of dividends to avoid all FICA. You have to pay yourself a salary that is close to "reasonable" and "customary" unless you want the IRS to flag you. Say I make 50K a year as a sole proprietor. I could look at the usual salary for someone who manages a like business and see that the medium range is 30-40k and pay myself that and take the remaining 20-30k in dividends that wouldn't be subject to FICA. I have several clients who have structured their businesses this way as sub-chapter S corps. They also have the corporation pay medical expenses and they rent property to the corporation so that they can get passive rental income as well, all to beat that big FICA tax. Again with the rental you have to use market rates, you can't pay 100k a year for a space when 100k a year is 200% of the market rate for a like space. The question that always comes up at this point is how does the IRS prove that you are paying yourself the market rate? Ha! They don't have to, you have to prove it to them. Meanwhile if you decide to test the limits here you can guarantee that if and when the IRS does flag you for being a tax shelter as opposed to a legitimate biz your accountant will bill you the full hourly rate to be there at the audit with you. I have one client who endured a nine month long audit where a field agent set up shop right inside his place of business. Imagine the cost both financial and psychological of a nine month long audit.

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