Introduction

When we talk about S-Corps, we usually address the most common benefit, the limited exposure to self-employment taxes that can save the taxpayer thousands of tax thousands of dollars every year. But what can you do if you're a high earner and your revenue for the last few years exceeds $500k, or at times $900k?

As a high earner, you'll take a higher wage of $200-$250k, pay self-employment tax in full, and even max out 401(k) contributions; but you still won't move the needle in tax savings. One strategy for a high earner can be a DB Plan (A Defined Benefit Plan for S Corp), or what we refer to in our professional language as a 401(k) on steroids. This is a plan that allows you to defer each year's higher amount of revenue, contributing to your retirement plan.

Fundamentals of 401(K)

Before we explain more about the benefits of Defined Benefit Plans, let's review the fundamentals of the beloved 401(k):  From about $100,000 in net income up to $284,000 the 401(k) plan helps to reduce your personal tax liability in two major ways:

1. You as the employee of the S-Corp can contribute to your retirement through the payroll, much like a W2 employee at a Fortune 500 corporation would be able to.
2. Your S-Corp, as the employer, would also be able to MATCH those contributions - profit sharing, up to the yearly limit ($57,000-$63,500 depending on age)

As the employee of the S-Corp you can contribute up to $19,500 of your salary to the 401(k) (with an additional $6000 if over 50, called catch-up contributions), and with a Profit-Sharing Plan the company can contribute up to $37,500 of company profits or 25% of compensation (see salary).

Benefits of an S-Corporation

S-Corps can be a secret weapon for self-employed. They offer significant tax benefits and lessen your self-employment taxes owed at the end of the year. You’ll have better access to benefits, protection against your assets, and credibility in your industry. But all those fantastic benefits come at a cost. The incorporation and complex compliance rules require both time and money for setup and ongoing maintenance of the business to comply. You’ll need excellent bookkeeping practices as well and a way to issue payroll for yourself.

But the benefits can significantly outweigh the cons. Some of the benefits include tax savings, access to corporate-level benefits, increased credibility, and more. When it comes to retirement savings in particular, self-employed are able to contribute more to their retirement by contributing as both the employee and employer of their business, ensuring they are making max contributions that set up their future success and help reduce their current tax liability.

Conclusion

Want to learn more about which retirement plan is right for you? Schedule a complimentary session to meet with one of our Business Consultants.