If your small business is registered as a S corporation, the fact of the matter is that it has to pay you reasonable compensation for the services you provide to the corporation. However, if your corporation pays your health insurance premiums, how does that affect the salary amount you need to pay yourself?
When it comes down to the law, it is required that as an S corporation owner-employee, you pay yourself reasonable compensation for the services you perform for the corporation.
What is reasonable compensation?
Reasonable compensation is the total value of remuneration you receive from your corporation, including both cash salary and benefits.
Reduce Your Salary, Increase Your Benefits
By choosing to reduce the amount of your cash salary, you’ll in turn be gaining two tax benefits.
For example, let’s say that your health insurance cost is $10,000. Instead of increasing your cash salary by $10,000, if you reduce your cash salary by the $10,000, you realize the following two tax benefits:
- You’ll save 15.3 percent in FICA taxes on the $10,000 decrease in cash wages (assuming your salary is less than $128,700).
- You’ll increase your possible Section 199A deduction by up to 20 percent (or $2,000) by avoiding the additional wage expense that would otherwise reduce your qualified business income.
If you would like to discuss this strategy in more detail, please contact our office at (732) 566-3660.