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I'm starting a new S-corporation in a new state, and I'm having a hard time trying to figure out how I'm supposed to structure compensation to myself which is also "fairly" taxed.

An S-corporation has pass-through taxation, so on the one hand I was thinking that I could just pass through 100% and avoid W-2 and unemployment issues entirely. Of course I'd still have to split the pass through between "dividend" and "salary", with the latter eligible for both SS and SE tax. I'm fine with this, and it seems the simplest route to go.

The problem is, I'm not sure if it's legal. I can't seem to find a straight answer anywhere, and even the various tax professionals I've spoken to seem to have a hard time agreeing.

The second option is to go through the hoops of hiring myself as an employee, do the W2 withholding, register with the state DOL for unemployment and income tax withholding, etc. A crap load of effort for, well, not much money.

Does anyone have direct experience with this situation? I was hoping that huge gobs of S-corporation owners would have run into this, but so far I haven't been able to find much on the subject.


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