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My wife is a realtor. She receives a 1099 and we pay taxes on that. I was talking to one of her fellow realtors and she told me that she had incorporated and now all her earnings come down to her as pass through (I assume as dividends?). I wonder if this is a good (and legitimate) strategy?

It sounds like your wife's colleague has elected S Corporation status for the corporation. You can indeed pass through income from an S Corp free of social security taxes. HOWEVER, an S Corp must pay it's owner/employees a reasonable compensation as salary - which would incur social security taxes. So you don't get to skip out on that tax completely.

The IRS has been winning cases over the last 10 or 15 years where S Corp owner/employees have not taken adequate compensation. They typically end up reclassifying all of the distributions as wages and collect a whole bunch of taxes, penalties, and interest.

--Peter
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