If you create an S-Corp then you wouldn't pay corporate tax since an S-Corporation is a passthrough entity. Legally you are protected and tax-wise you only pay on the 1040, but you avoid SE Tax.

I could point you to a number of resources to clarify the issue, if your interested?

I am interested. I believe you about the corporate taxes, but I have a hard time believing you are able to avoid the SE tax.

On way or another the full 15.3% social security tax is going to be paid.

Hey ars, well the best way to explain the concept is to think about how you are taxed on dividends. When you buy stock in Google and receive dividends, you would pay tax on that income on your 1040, but it would not be taxed as a "self-employment income" and thus SE Tax is not levied.

An S-Corporation is a standard C-Corporation that has elected for special treatment. Instead of paying double taxation, its income is directly passed-through to the taxpayer. But, that does not change the character of the income. The income is still considered a "corporate distribution" or a dividend. Thus, it cannot be cannot be taxed under SE Tax rules because a dividend is not "self-employed income."

This rule is found at IRC § 1368 (c)(2) :

In the case of a distribution described in subsection (a) by an S corporation which has accumulated earnings and profits—

      1368(c)(1) Treatises Accumulated adjustments account.
      That portion of the distribution which does not exceed the accumulated adjustments account shall be treated in the manner provided by subsection (b) . 

      1368(c)(2)Dividend.
      That portion of the distribution which remains after the application of paragraph (1) shall be treated as a dividend to the extent it does not exceed the accumulated earnings and profits of the S corporation. 

      1368(c)(3)Treatment of remainder.
      Any portion of the distribution remaining after the application of paragraph (2) of this subsection shall be treated in the manner provided by subsection (b) . 

But, note that you must pay a reasonable salary to yourself first to apply this tax strategy or plan. There are certain pitfalls that you must be aware of as with any tax plan.

I hope that this has been helpful! =D

I've always wondered what the proper criteria for "reasonable salary" were. Care to offer one of your wonderful Hacker News summaries on that matter?

By the way, it's great to see a qualified member of the HN community offering help to Etymonline. Do let us know if anything comes of it (he's says he's made contact with a local tax lawyer, but based on your reputation here, I'd rest easier if he were in your hands ;-).

Thanks pw, I've read his update on the situation and I've offered to help guide him through the decision of whether to incorporate his website as a business or as a non-profit as well as help actually incorporate his website.

I've yet to hear back from him, so I haven't had anything to update. I'm guessing that he feels comfortable with the information he learned from the tax attorney and is satisfied with the help he's received.

In regards to the "reasonable salary" issue that's a difficult topic to explain because its a subjective test. The word reasonable is going to be very different for the IRS compared to the average taxpayer.

In my experience, a "reasonable salary" is going to depend a number of factors. The best way to prove that you're getting a reasonable salary is to have "comps" or comparable positions with the same functions and them take the average of their salary.

Ex: Your job description is an entry level developer. Average salary is in the range of 55k to 75k but the mean is 60k. In this situation you could argue for any salary between 55k and 75k, but the clearest answer would've been 60k. Subjectivity please a big role in this area.

Also, experience has given me a "gut feeling" on what is reasonable so often times I go by just guessing based on what I've seen on the past.

Lastly, thanks for the props! I'm honestly surprised that anyone even bothers to read my posts about boring tax loll but I'm glad to have been of help =D.