Now, Senator Edwards talks about the need to provide health care for all and that’s where he is really exposed. He’s out there talking about health care, he himself has done more to damage health care by raising costs because of his actions as a trial lawyer. And he has also compounded that by structuring his own personal finances to avoid paying Medicare taxes on 90% of the nearly $27 million he earned over four years.
“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.” Because of things like what Edwards is doing, the IRS is looking into this. “Attorney CPA magazine lists it as No. 11 of its ’15 best underutilized tax loopholes.'” Attorney CPA magazine, you ever heard of that? Attorney CPA magazine lists the Edwards loophole as number 11 of its 15 best underutilized tax loopholes. They warned 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.”
Now, about that. Well, I don’t have time to explain this, but I got an e-mail from a very friendly CPA, “Hey, Rush, keep in mind, however, that an S corporation owner does pay double Social Security.” That’s one of my favorite arguments, and I love to nuke this, just hit this out of the ballpark. You know, how many of you think that your employer matches your FICA contribution? That’s your Social Security. You look at your pay stub and you take your FICA, and you think, whatever it is, 12%, 15% a year, I’m not even sure even though I pay “both sides”, but you probably think your employer is paying half of it and you’re paying half of it. And of course the CPA wants us to feel sorry for his S Corp. clients because they’re paying both sides, they’re paying it all. Well, if John Edwards is going to pay himself $360,000 he’s going to pay both sides and still max out and not owe any more because, unlike Medicare, Social Security taxes have a ceiling. Once you earn a certain amount, you stop paying the tax. That ceiling rises every year. Medicare, you pay it on the whole amount of your earnings. But it’s a myth that your employer is matching your Social Security contribution. You’re paying it all, too, just like this lowly sub-S guy is. The difference is you never see half of it. It just gets withheld before it ever gets to your hands.
Now, if you have any doubts about this, I urge you to call me. I urge you to ask me to walk you through this. Because if you think — just like you think you’re screwing the government when you get a big refund check every year — you are the screwee, not the government.
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