May 21, 2020
The Importance of Benefits in Tax Savings for S-Corps
While the most important part of leveraging your tax savings from the S-Corp structure is the payroll you will need one more tool to maximize those savings: benefits.
What kind of benefits can you create for yourself as an employee of an S-Corp? Turns out you can take advantage of many of the same benefits that employees of larger corporations can get, simply by making sure you take the appropriate amount of payroll. Let's dive into some of the best options:
While not increasing your overall tax savings by much due to the limited costs associated with this type of benefit you can unlock corporate-level health plans with your S-Corporation which can be fully deductible on your business taxes as expenses. You do have to include those costs as compensation on your W2 (they are taxable for federal income taxes) you still realize some savings and additional features by running the health plan through the business. This can cover your family as well just like with corporate-level employment.
Whether matching contributions to your SEP IRA up to 25% of your wages or leveraging the extended employer contributions enabled by a 401(k) plan the retirement plan benefits are by far the greatest benefit that you can get as the officer of an S-Corp. We did a whole deep dive on this here but the "too long; didn't read" version is that you can potentially carve out almost $40k in deductible expenses with the right plan and payroll, moving that chunk of cash into your retirement savings and out of your taxable income.
While there are tax benefits to merely switching from a sole proprietorship or LLC into an S-Corp you don't really unlock the full potential of the tax savings until you start leveraging these additional benefit payments. We see immediate tax savings just by electing to be an S-Corp of course, but the tax savings once you get to start the retirement benefits can explode your S-Corp potential. This is the reason we recommend the S-Corp to everyone but especially once you start making greater than $160,000 net income in a year.