[freedumb2003]

Start a business, pay yourself a meager, subsistence-level salary, and take out most of your earnings in dividends

Have you actually done this? I owned my own business and I remember they hit me up for an equivilant of SSI to put into SSI -- based on gross profits.

But maybe I disremember....

[Alberta's Child]

Were you organized as a corporation, or as a sole proprietorship? A sole proprietorship technically doesn't pay any dividends -- so all your income is taxed as income.

In the case of corporate ownership, there may be some regulations that are put in place to restrict how much you can pay yourself in dividends compared to what you pay yourself in salary. You can sometimes get around this by listing family members as shareholders and paying them dividends, too. Just make sure you have little Johnny buy his own school clothes and maybe spring for groceries once a month, if you know what I mean -- it's "his" money, after all.

[walden]

No, you remember correctly-- that's the self-employment tax, and you pay the whole thing. However, since the tax law change, if you pay yourself dividends rather than salary, I think that you only pay income tax on 50% of that amount and no self-employment tax on it at all. That option wasn't available until recently, but now, it's definitely the way to go.

I do think you need to set it up as either a regular corporation or a Sub-S for that to work, though. Can't just use the regular 1040 with the sole proprietor form.