The extenders legislation currently under consideration (see related post) would shut down a method of avoiding employment tax (including self-employment tax) used by many individuals who earn money from personal services. A dentist, for example, who earns $90,000 in fee income might form an S corporation to receive that income, and pay himself a salary of $2,000 per month, taking the rest of the money as a distribution (dividend). He would still pay income tax on the entire $90,000, but avoid paying Social Security and Medicare tax on the amount above his salary $24,000. These arrangements are subject to challenge by the IRS, but the tax agency doesn’t have the resources to pursue all the individuals who use this technique. (more…)