I think there's a lot of smoke being blown about the "fair market salary" thing, as if the IRS was capriciously planning the US economy during audits. It seems to me --- and I'm prepared to be wrong here --- that the deal is simple: look at your quarterly estimated payments, add up all your income, and if it looks like you're getting a significant break on FICA because of the way you've structured your income, fix it: there's no free lunch.

I disagree unless the payment you are making to yourself as distributions is fair compensation for services provided to the company. A company's purpose is to make a profit, and if you are distributing profit to yourself, then there is no reason to pay FICA on that income. The "fair market salary" is important because if you are forced to pay yourself arbitrarily more (like you suggested), it would be in the best interest of the person to instead hire someone to do his job for him (at fair market salary) and simply collect the profits. (In fact, this could be the long term goal: hire someone to manage the business and retire on the profits!)

If you'd like to know why it's "fair" for people to be allowed to pay income tax and not FICA tax on profit, then you need to look at the C corporation code. Under this system, the corporation pays a corporate income tax, and then can pay profits to its shareholders as dividends, which are then also subject to a second tax. You'll note that there is no payroll tax in this system. The purpose of an S-corporation is to avoid this "double taxation" for very small companies and instead use the personal income tax code, which may be (but is not necessarily) cheaper for the shareholder. This is not a loophole: it is by design.

It is also worth noting that just because the taxes are paid through the personal income tax code, that doesn't mean that person received that profit as a cash distribution. That money may very well be put to a different purpose, e.g. investing in the business in some way which is not yet tax deductible (like a large capital purchase), in the bank as float, or invested in some way.

In the case mentioned in the article, I certainly agree the owner was not paying himself enough by W-2 for his services, particularly if he was the sole employee and otherwise received that income as a cash distribution. He is obviously an experienced CPA who would be paid much more on the open market, and as a CPA, he should have known better.