Three Easy Tax Planning Tips for the One-man S Corporation

The one-man or one-woman S corporation often gets the short shrift when it comes to tax planning. And maybe that should not be a surprise.

Oftentimes, these small businesses don't have their tax returns prepared by a business tax expert, but rather a bookkeeper, enrolled agent or CPA who specializes in individual taxes. Furthermore, even if this small business owner steps up to a larger CPA firm, chances are good that firm will specialize in serving bigger businesses that work and look differently when it comes to tax accounting.

Fortunately, the three best tax planning options available for limited liability companies and corporations that have elected subchapter S status are easy to understand and implement...

S Corp Tax Planning Idea #1: Set a Reasonably Low Salary

The one shareholder-employee subchapter s corporation should be in the best possible position to set a reasonable yet low salary. And this tax planning opportunity represents a potentially huge tax saver. By reducing a shareholder-employee's salary by $50,000 and then simultaneously increasing the shareholder's distributions by $50,000, the business owner saves as much as $7,500 annually.

Note: Decreasing the shareholder-employee salary in a one-owner S corp saves money because only the portion of the business profit labeled "wages" gets subjected to Social Security and Medicare taxes. Social Security taxes cost the small corporation shareholder-employee 12.4% of the first $106,800 of wages in 2010. Medicare taxes cost the small corporation shareholder-employee 2.9% of any amounts paid as wages.

S Corporation Tax Planning Idea #2: Use a Healthcare Reimbursement Arrangement

Many self-employed small businessmen and women can deduct their health insurance on their personal tax returns, thereby saving income taxes. But one-person S-corps have an even better option. This one-owner business can often set up something called a Sec. 105(b) healthcare reimbursement arrangement that reimburses shareholder-employees for healthcare expenses. In other words, with a Sec. 105(b) plan in place for an S corporation, the business owner may be able to turn all of his or her family's healthcare expenses into business tax deductions.

A couple of important notes about this gambit. First, do note that a business tax deduction is better than a personal income tax deduction. A business tax deduction saves the business owner both income taxes and payroll (or employment) taxes. Second, a Sec. 105(b) plan might allow a business owner to deduct more healthcare costs--in other words, rather than just deducting health insurance, the business owner might be able to also deduct uncovered healthcare expenses--such as co-pays, deductibles and uncovered care options like orthodontia for teenage kids.

S Corporation Tax Planning Idea #3: Use an SEP-IRA Pension Option

One final, very sweet tax planning option exists for small businesses--and in particular for small limited liability companies and corporations that have elected subchapter S status. Small businesses can use a SEP-IRA pension plan option that allows the employer (the business, that is) to contribute up to 25% of the shareholder-employee's wages to their IRA.

Note: The acronym SEP stands for Simplified Employee Pension. And this pension plan option really is simple. You can setup one of these pension plans by filling out boilerplate paperwork supplied by any bank, mutual fund, or financial services company. After that initial "work," you only need to remember to write the check out of the corporate account by the tax return filing date.

You are allowed to make very large SEP contributions. For example, you can make annual contributions as large as $49,000 in 2010. (A $49,000 contribution represents a 25% contribution when the shareholder receives $196,000 of wages. And that's one huge component of their attraction.

But the large contribution size isn't the only attraction. SEP-IRA contributions, when they appear on a corporation tax return, act as a deduction both for income tax purposes and for employment tax purposes. (So you save, in effect, two taxes when you use a SEP-IRA from inside an S corporation.) Furthermore, the SEP-IRA contribution comes out of the S corporation's profits and not the shareholder-employee's wages--which should make it reasonable to use a lower salary.

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<!DOCTYPE HTML PUBLIC '-//W3C//DTD HTML 4.01 Transitional//EN' 'http://www.w3.org/TR/html4/loose.dtd'><html><head><title>Articles Back Link | Three Easy Tax Planning Tips for the One-man S Corporation</title></head><body><h3>Three Easy Tax Planning Tips for the One-man S Corporation</h3><br><br> By: Stephen Nelson<br><br><p><p>The one-man or one-woman S corporation often gets the short shrift when it comes to tax planning. And maybe that should not be a surprise.</P><p>Oftentimes, these small businesses don't have their tax returns prepared by a business tax expert, but rather a bookkeeper, enrolled agent or CPA who specializes in individual taxes. Furthermore, even if this small business owner steps up to a larger CPA firm, chances are good that firm will specialize in serving bigger businesses that work and look differently when it comes to tax accounting.</P><p>Fortunately, the three best tax planning options available for limited liability companies and corporations that have elected subchapter S status are easy to understand and implement...</P><p>S Corp Tax Planning Idea #1: Set a Reasonably Low Salary</P><p>The one shareholder-employee subchapter s corporation should be in the best possible position to set a reasonable yet low salary. And this tax planning opportunity represents a potentially huge tax saver. By reducing a shareholder-employee's salary by $50,000 and then simultaneously increasing the shareholder's distributions by $50,000, the business owner saves as much as $7,500 annually.</P><p>Note: Decreasing the shareholder-employee salary in a one-owner S corp saves money because only the portion of the business profit labeled "wages" gets subjected to Social Security and Medicare taxes. Social Security taxes cost the small corporation shareholder-employee 12.4% of the first $106,800 of wages in 2010. Medicare taxes cost the small corporation shareholder-employee 2.9% of any amounts paid as wages.</P><p>S Corporation Tax Planning Idea #2: Use a Healthcare Reimbursement Arrangement</P><p>Many self-employed small businessmen and women can deduct their health insurance on their personal tax returns, thereby saving income taxes. But one-person S-corps have an even better option. This one-owner business can often set up something called a Sec. 105(b) healthcare reimbursement arrangement that reimburses shareholder-employees for healthcare expenses. In other words, with a Sec. 105(b) plan in place for an S corporation, the business owner may be able to turn all of his or her family's healthcare expenses into business tax deductions.</P><p>A couple of important notes about this gambit. First, do note that a business tax deduction is better than a personal income tax deduction. A business tax deduction saves the business owner both income taxes and payroll (or employment) taxes. Second, a Sec. 105(b) plan might allow a business owner to deduct more healthcare costs--in other words, rather than just deducting health insurance, the business owner might be able to also deduct uncovered healthcare expenses--such as co-pays, deductibles and uncovered care options like orthodontia for teenage kids.</P><p>S Corporation Tax Planning Idea #3: Use an SEP-IRA Pension Option</P><p>One final, very sweet tax planning option exists for small businesses--and in particular for small limited liability companies and corporations that have elected subchapter S status. Small businesses can use a SEP-IRA pension plan option that allows the employer (the business, that is) to contribute up to 25% of the shareholder-employee's wages to their IRA.</P><p>Note: The acronym SEP stands for Simplified Employee Pension. And this pension plan option really is simple. You can setup one of these pension plans by filling out boilerplate paperwork supplied by any bank, mutual fund, or financial services company. After that initial "work," you only need to remember to write the check out of the corporate account by the tax return filing date.</P><p>You are allowed to make very large SEP contributions. For example, you can make annual contributions as large as $49,000 in 2010. (A $49,000 contribution represents a 25% contribution when the shareholder receives $196,000 of wages. And that's one huge component of their attraction.</P><p>But the large contribution size isn't the only attraction. SEP-IRA contributions, when they appear on a corporation tax return, act as a deduction both for income tax purposes and for employment tax purposes. (So you save, in effect, two taxes when you use a SEP-IRA from inside an S corporation.) Furthermore, the SEP-IRA contribution comes out of the S corporation's profits and not the shareholder-employee's wages--which should make it reasonable to use a lower salary.<br></P></p> <br><br> <b>Author Resource:-></b>  <br><br><b>Article From</b> <a href='http://www.articlesbacklink.com/'>Articles Back Link</a><br></body></html>