I'm a sole proprietor making about $200-250k a year. I'm getting killed with self-employment taxes. I'm thinking about forming an S-corp and paying myself a reasonable salary and distributing the rest through dividends (so it is exempt from SE taxes). How do you determine what is "reasonable"? Do I take the average salary that someone in my profession in my geographic area makes? Or would the IRS conclude that if I was making $200k+ a year before I went to S-corp that a "reasonable" salary would be $200k?

The business, btw, is entirely service oriented, so I can't really justify dividends as easily as businesses involving capital assets. Also, the average in my field is prob $70-80k, which means that if that's a "reasonable" salary, then after $88,200, I only save about 2.9% a year on the rest - which may be cancelled out with the costs and pain in the butt of having an S corp in California.

What do you think?