I’m afraid that it’s you who do not understand the tax treatment of Subchapter S corporations. They are known as “pass through entities” and the good Senator is running a payroll tax scam.
The Sub S Corporation issues a K-1 to Edwards, classifying the smaller amount ($600,000) as salary, and the larger amount ($5,000,000) as Trade and Business Income. The salary shows up on his W-2 and the Trade and Business Income shows up on his Schedule E. A neat dodge of the Medicare tax. In Edwards’ tax bracket, both salary and Schedule E income are taxed at the same rate.
Novak has only one thing wrong; Sub S corporations do not pay dividends. The distributions are classified as I explained above.
Less exalted people have gotten prosecuted for this particular tax dodge.
Look I'm going to try this one last time. I completely understand the tax treatment of Sub Chapter S corporations and I believe that I indicated that they " pass through" to stockholders. I'm not sure what your point is in detailing the tax forms (K-1 & W-2) that the various incomes are reported on. They still pass through to the stockholder to be taxed as ordinary income. You in fact prove my point when you confirm that " both salary and Sch. E income are taxed at the same rate." What I am trying to convey is, yes, he avoids the lower rate Medicare tax (2.754%) but pays a much higher marginal income tax rate on his income. I find it to be an uncomfortable position in defending Edwards, but disagree with you that it is a tax scam.