| An S corporation with a single shareholder-employee | | | | expenses into business tax deductions. |
| often gets short-changed in terms of good tax | | | | A couple of important notes about this gambit. First, do |
| planning. But perhaps that shouldn't be a surprise. | | | | note that a business tax deduction is better than a |
| Oftentimes, these small businesses don't have their tax | | | | personal income tax deduction. A business tax |
| returns prepared by a business tax expert, but rather | | | | deduction saves the business owner both income |
| a bookkeeper, enrolled agent or CPA who specializes | | | | taxes and payroll (or employment) taxes. Second, a |
| in individual taxes. Furthermore, even if this small | | | | Sec. 105(b) plan might allow a business owner to |
| business owner steps up to a larger CPA firm, | | | | deduct more healthcare costs--in other words, rather |
| chances are good that firm will specialize in serving | | | | than just deducting health insurance, the business |
| bigger businesses that work and look differently when | | | | owner might be able to also deduct uncovered |
| it comes to tax accounting. | | | | healthcare expenses--such as co-pays, deductibles |
| Fortunately, the three best tax planning options | | | | and uncovered care options like orthodontia for |
| available for limited liability companies and corporations | | | | teenage kids. |
| that have elected subchapter S status are easy to | | | | S Corporation Tax Planning Idea #3: Use an SEP-IRA |
| understand and implement... | | | | Pension Option |
| S Corp Tax Planning Idea #1: Set a Reasonably Low | | | | One final, very sweet tax planning option exists for |
| Salary | | | | small businesses--and in particular for small limited |
| The one shareholder-employee subchapter s | | | | liability companies and corporations that have elected |
| corporation should be in the best possible position to | | | | subchapter S status. Small businesses can use a |
| set a reasonable yet low salary. And this tax planning | | | | SEP-IRA pension plan option that allows the employer |
| opportunity represents a potentially huge tax saver. By | | | | (the business, that is) to contribute up to 25% of the |
| reducing a shareholder-employee's salary by $50,000 | | | | shareholder-employee's wages to their IRA. |
| and then simultaneously increasing the shareholder's | | | | Note: The acronym SEP stands for Simplified |
| distributions by $50,000, the business owner saves as | | | | Employee Pension. And this pension plan option really is |
| much as $7,500 annually. | | | | simple. You can setup one of these pension plans by |
| Note: Decreasing the shareholder-employee salary in a | | | | filling out boilerplate paperwork supplied by any bank, |
| one-owner S corp saves money because only the | | | | mutual fund, or financial services company. After that |
| portion of the business profit labeled "wages" gets | | | | initial "work," you only need to remember to write the |
| subjected to Social Security and Medicare taxes. | | | | check out of the corporate account by the tax return |
| Social Security taxes cost the small corporation | | | | filing date. |
| shareholder-employee 12.4% of the first $106,800 of | | | | You are allowed to make very large SEP contributions. |
| wages in 2010. Medicare taxes cost the small | | | | For example, you can make annual contributions as |
| corporation shareholder-employee 2.9% of any | | | | large as $49,000 in 2010. (A $49,000 contribution |
| amounts paid as wages. | | | | represents a 25% contribution when the shareholder |
| S Corporation Tax Planning Idea #2: Use a Healthcare | | | | receives $196,000 of wages. And that's one huge |
| Reimbursement Arrangement | | | | component of their attraction. |
| Many self-employed small businessmen and women | | | | But the large contribution size isn't the only attraction. |
| can deduct their health insurance on their personal tax | | | | SEP-IRA contributions, when they appear on a |
| returns, thereby saving income taxes. But one-person | | | | corporation tax return, act as a deduction both for |
| S-corps have an even better option. This one-owner | | | | income tax purposes and for employment tax |
| business can often set up something called a Sec. | | | | purposes. (So you save, in effect, two taxes when |
| 105(b) healthcare reimbursement arrangement that | | | | you use a SEP-IRA from inside an S corporation.) |
| reimburses shareholder-employees for healthcare | | | | Furthermore, the SEP-IRA contribution comes out of |
| expenses. In other words, with a Sec. 105(b) plan in | | | | the S corporation's profits and not the |
| place for an S corporation, the business owner may | | | | shareholder-employee's wages--which should make it |
| be able to turn all of his or her family's healthcare | | | | reasonable to use a lower salary. |