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Senator Edwards talks about the need to provide health care for all, but that didn't stop him from using a clever tax dodge to avoid paying $591,000 into the Medicare system. While making his fortune as a trial lawyer in 1995, he formed what is known as a "subchapter S" corporation, with himself as the sole shareholder.
Instead of taking his $26.9 million in earnings directly in the following four years, he paid himself a salary of $360,000 a year and took the rest as corporate dividends. Since salary is subject to 2.9% Medicare tax but dividends aren't, that meant he shielded more than 90% of his income. That's not necessarily illegal, but dodging such a large chunk of employment tax skates perilously close to the line.
The Internal Revenue Service takes a dim view of such operations and "may collapse the structure entirely and argue the S corporation is not truly a separate entity," in the words of Tax Adviser magazine. Attorney CPA magazine lists it as No. 11 of its "15 best underutilized tax loopholes," but warns that the IRS "has successfully litigated cases against individuals, particularly sole shareholders of personal service S corporations, reclassifying such deemed distributions as wages subject to social security taxes."
Posted by Ted at July 13, 2004 6:10 AM