Execute S-Corp Officer Compensation With Employee Deductions Before Year-End

December 10, 2019 | By: Robert A. Green, CPA

TTS traders need an S-Corp trading company to arrange health insurance and retirement plan deductions. These deductions require earned income or self-employment income. Unlike trading gains, S-Corp salary is considered earned income.

The S-Corp must execute officer compensation, in conjunction with employee benefit deductions, through formal payroll tax compliance before the year-end 2019. Otherwise, traders miss the boat. TTS is an absolute must since an S-Corp investment company cannot have tax-deductible wages, health insurance, and retirement plan contributions. This S-Corp is not required to have “reasonable compensation” as other types of businesses are, so a TTS trader may determine officer compensation based on how much to reimburse for health insurance, and how much they want to contribute to a retirement plan. If you are in the QBI phase-out range, you might wish to have higher wages to increase a QBI deduction. For payroll tax compliance services, I recommend paychex.com; it has a dedicated team for our TTS S-Corp clients. Sole proprietor and partnership TTS traders cannot pay salaries to 2% or more owners.

TTS S-Corps may only deduct health insurance for the months the S-Corp was operational and qualified for TTS. Employer-provided health insurance, including Cobra, is not deductible. It doesn’t need to be profitable for the health insurance deduction.

A taxpayer can deduct a contribution to a health savings account (HSA) without TTS or earned income. HSA contribution limits for 2019 are $3,500 individual and $7,100 for family coverage. There’s an additional $1,000 for age 55 or older. Some employers offer a flexible spending account (FSA) for covering health care copayments, deductibles, some drugs, and other health care costs. Both HSAs and FSAs must be fully funded and utilized before the year-end.

TTS S-Corps formed later in the year can unlock a retirement plan deduction by paying sufficient officer compensation in December when results for the year are evident. Traders should only fund a retirement plan from trading income, not losses.

You must open a Solo 401(k) retirement plan for a TTS S-Corp with a financial intermediary before the year-end 2019. Plan to pay the 2019 100%-deductible elective deferral amount up to a maximum of $19,000 (or $25,000 if age 50 or older) with December payroll. That elective deferral is due by the end of January 2020. You can fund the 25% profit-sharing plan (PSP) portion of the S-Corp Solo 401(k) up to a maximum of $37,000 by the due date of the 2019 S-Corp tax return, including extensions, which means Sept. 15, 2020. The maximum PSP contribution requires wages of $148,000 ($37,000 divided by 25% defined contribution rate). Tax planning calculations will show the projected outcome of income tax savings vs. payroll tax costs for the various options.

Consider a Solo 401(k) Roth, where the contribution is not deductible, but the contribution and growth within the Roth are permanently tax-free. Traditional plans have a tax deduction upfront, and all distributions are subject to ordinary income taxes in retirement. Traditional retirement plans have required minimum distributions (RMD) by age 70½, whereas Roth plans don’t have RMD.

Setting up a TTS S-Corp for 2020
If you missed out on employee benefits in 2019, then consider an LLC with S-Corp election for 2020. You can form a single-member LLC by mid-December 2019, obtain the employee identification number (EIN), and open the LLC brokerage account before year-end to begin trading in it on Jan. 1, 2020. The single-member LLC is a disregarded entity for 2019, which avoids an entity tax return filing for the 2019 partial year. A spouse can be added as a member of the LLC on Jan. 1, 2020, which means the LLC will file a partnership return for 2020. If you want health insurance and retirement plan deductions, then your single-member or spousal-member LLC should submit a 2020 S-Corp election within 75-days of Jan. 1, 2020. The S-Corp should also consider making a Section 475 MTM election on securities only for 2020 within 75 days of Jan. 1, 2020.

Clients of our firm GNM should sign up for S-Corp Tax Compliance (Traders) and work with their assigned CPA before the year-end.

If you want to set up an LLC in December with S-Corp election for 2020, start with a 45-minute paid consultation with Robert A. Green, CPA. You can purchase our entity formation service afterward.

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