Guest blog post from Wealth Enhancement Group
One of the advantages of owning your own business is that you have the ability to convert personal non-deductible expenses to business expenses if they qualify as necessary expenses to operate and grow your business. We will not talk about putting your spouse or children on the payroll (unless they work for your business), filling up your boat with gas using the company credit card (unless you are entertaining clients or employees) or overpaying rent to yourself (if you own the building) as a way to avoid social security taxes. Clearly some strategies are illegal and not justified. However, there are many group and individual fringe benefits that you can utilize and offer to “attract and retain” good employees. There are also lesser known benefits that only have to be offered to select employees including maybe just yourself.
Qualified benefits are tax deductible upfront because they are offered to all (eligible) employees. Basic fringe benefits include Medical, Dental, Vision, Child Care, Life Insurance, Gym memberships, Disability Insurance and/or Long-Term Care Insurance to name a few. These benefits are expected by most employees today. However, you can create “tiered” benefits for different groups of employees.
Qualified Plans are also a basic fringe benefit and include 401k, SIMPLE IRA, Profit Sharing and ESOP (Employee Stock Ownership Plans). Comparing 401k’s to SIMPLE IRA’s will highlight the lower cost and simpler operations of SIMPLE IRA’s assuming you have a good internal CFO/Bookkeeper. Only 401k’s offer a ROTH option and allow for higher contributions. You can combine a “carefully designed” profit sharing plan on top of your 401k that can target the bulk of the contributions to key owners, managers.
Non-qualified benefits are not tax-deductible up-front as the IRS does not require you to offer them to all employees. So, is the tax deduction offered by Qualified/Group benefits more important than having the ability to target key employees? All Employees are important but only a few are key and hard to replace. Examples of non-qualified benefits include Deferred Compensation, 401k Pour Over plans, Phantom Stock, and Rolling Bonus programs. These programs can be designed to pay out for example, at 10 years of service, when employees child needs education contributions, and/or retirement.
For those employees who desire to have minority ownership in your company, you first have to decide if you can tolerate or co-exist with a new partner/shareholder. Shareholders have legal rights to inspect the books and raise (prickly) questions. Of course, since you would always have 51% of the voting stock, you could still make all decisions (except liquidation which requires 67%).
You can bonus cash to your key employees who can buy stock from you after paying income tax on the bonus. You would lower your total tax bill since your stock sale would be potentially taxed at favorable Capital Gains rates. You could also institute a stock bonus program where the company issues more stock subject to income tax by the recipient, as a form of “sweat equity” for past years of service. Planning your succession is important to you and your family. Locking in your key employees increases the value of your business if a third-party sale is considered. Even if you chose not to offer them stock, you could always construct a bonus program from the sale proceeds should ownership change. Since most key employees don’t have a lot of cash, you will have to be willing to assist in their buy in to your company.
Using your business for personal benefit improves not only your financial life but also the lives of your employees.
Donald S. Hannahs, CFP® | Sr. VP – Financial Advisor
Wealth Enhancement Group®
2247 W. Great Neck Road | Suite 201 | Virginia Beach, VA 23451
p. +1 757-271-8824
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual