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Free Tax Tip #8: Think About Your Salary

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(credit: CBS)

by Barry Steiner CPA (Former IRS agent)

Managing a tax burden has never been more difficult, whether you're managing your individual tax rates, the rates on your investments, the taxes on your privately held or pass-through business, or the income of executives and shareholders at your company. Lawmakers have been aggressively using the tax code to try to get the economy back on track, and there are now more ways than ever to reduce your tax liability – however, all of them take planning.

8. Self employed? Think about your salary

If you own your own corporation and work in the business, think carefully about your salary structure. Your tax treatment will vary considerably depending on whether your business is a traditional C corporation or an S corporation (in which corporation income Is "passed through" and taxed at the individual level). Distributions of corporate income are generally not subject to Social Security taxes. So if your business is an S corp, you will pay Social Security taxes only on your salary, not on any income you received as a distribution. C corporation distributions may also escape Social Security taxes, but are subject to a 15 percent dividend tax rate. So many C corporation owners will pay less overall tax on income received as salary (which is deducible to the corporation), while S corporation owners may do better if more income is received as dividends. Be careful; IRS is cracking down on misclassification of payments to shareholder-employees who claim too little salary.

Your Weekly Tax Jokes

"President Bush says he's going to simplify the tax code. Only the states that are blue will have to pay." - David Letterman

"President Bush said yesterday it doesn't make any sense to raise taxes on the rich because rich people can figure out how to dodge taxes. Then Dick Cheney said 'Shut up! You're ruining everything.'" - Jay Leno

"This week, President Bush and Vice President Dick Cheney released their tax returns. Chaney made more money than the president. When asked about it, the president said, 'That's true, but he also made more decisions.'" - Conan O'Brien

"The IRS said today anyone with a refund coming from their 2001 taxes will lose it if they don't pick it up by April 15th. If it is more than three years they will just keep it. How come it doesn't work that way with back taxes?" - Jay Leno

"We ought to thank President Bush. He made it a lot easier for people to do taxes this year. No job, no income tax this year-." - Jay Leno

"Earlier today, the White House released President Bush's tax return. Not surprisingly, under dependents, the president listed Iraq." - Conan O'Brien

"President Bush released his tax returns yesterday. He listed the economy as a liability. He gets to write that off." - Jay Leno

Click here to see previous Tax Tips from Barry R. Steiner. Check back next Wednesday for another free tax tip – one tip for each week of the tax season until April 17th.

Barry R. Steiner is a Chicago-based CPA and former IRS Agent. He's the author of the best-selling income tax guide "Pay Less Tax Legally" and was a regularly featured guest on ABC-TV's "Good Morning America". Barry has maintained his own tax practice for the past 40 years, and most recently has authored two e-books: "Infernal Residue" and "Kiss My IRS". More info at KissMyIRS.com »

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