November 28, 2018

Slash Your S-Corp Taxes

Reduce S Corporation Owner’s Wages — As the owner of an S corporation, you can legitimately cut payroll taxes by thousands of dollars by paying yourself a lower salary and taking the rest of your income as distributions. But you need to make sure that you don’t drop your salary below what the IRS considers “reasonable compensation.”

S Corporation Covers the Owner’s Health Insurance Premiums — The S corporation can establish a health insurance plan for the owner-employee who owns more than 2 percent in one of two ways: 1) the S corporation pays the premiums for the owner-employee and family, or 2) the S corporation reimburses the owner-employee for the premiums.

Employ Your Child — The S corporation owner must pay payroll taxes on the child’s wages, but the family enjoys a decrease in income taxes. Each child can earn up to $12,000 without paying any federal income taxes.

Reimbursement of Home-Office Expenses — When the S corporation reimburses the owner for home-office expenses, this reimbursement is a deduction for the S corporation and tax-free income to the owner.

Reimbursement of Depreciation Expenses — The S corporation can reimburse the S corporation owner for depreciation expenses (as well as Section 179 expenses) related to business use of a vehicle, a home office, and other assets. This is a deduction for the S corporation and tax-free income for the owner. A qualifying “heavy” vehicle used for business can produce a substantial Section 179 first-year depreciation deduction.

Reimbursement of Travel Expenses — An S corporation owner who incurs business-related travel expenses must submit an expense report and be reimbursed by the S corporation; other arrangements have disastrous tax consequences.

Cell Phone Expenses — When an S corporation provides an employee with a smartphone or similar telecommunications equipment primarily for non-compensatory business reasons, this is considered a working condition fringe benefit that is excludable from income. The S corporation can reimburse the employee for the full cost of the phone expenses (including the personal use) and deduct this amount on the corporate tax return. The reimbursement is tax-free income to the employee.