Savvy Tax Moves for Small Business Owners

Tired of torching profit on last‑minute purchases that don’t move the needle? Host, Andy Keeler dives into a smarter path for small business owners: using entity structure, reasonable compensation, and layered retirement plans to legally cut taxes while building real wealth you control. With CFP Michael Davis of Creative Retirement Solutions, we unpack the practical differences between sole proprietors and S-Corps and how to set compensation that passes the smell test without kneecapping your contribution room.

From there, we map out a clear plan stack. IRAs and a well-built 401(k) with profit sharing is the engine, allowing high, deductible contributions that actually dent your tax bill. Then we open the door to cash balance pension plans—ideal for profitable owners, especially those older than their teams. Andy and Michael talk real numbers, typical costs, and why tax credits can offset setup and admin too.

Flexibility is the throughline in this episode. Plan designs can be tuned to your budget, frozen in tough years, and amended as profits change. For many owners, that means capturing 90%+ of contributions personally when demographics line up, all while treating employees fairly with vesting and transparent benefits. The result is a toolkit that shifts dollars from wasteful spend into assets that compound over time. 

Listen now, then subscribe, share with a fellow owner, and leave a review telling us which strategy you’ll start with.

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations.

It is only intended to provide education about finance, tax, retirement and related planning topics. To determine which investments or strategies may be appropriate for you, consult your financial, tax or legal advisor prior to implementing. Any past performance discussed during this program is no guarantee of future results.

Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

Keeler & Nadler Family Wealth is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Keeler & Nadler Family Wealth and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Keeler & Nadler Family Wealth unless a client service agreement is in place.

Transcript

Meet The Expert And Entity Basics

Sole Prop vs S-Corp And Payroll Taxes

SPEAKER_01 0:02

Do you own a profitable small business and want to lower your tax bill? Has your strategy been to buy a bunch of stuff that decreases in value or things that you don't truly need at all? On a previous episode, we discussed business valuation and entrepreneurship. My guest on the show, Emmett Apollinario, mentioned owner compensation plays a fairly large role in business valuation. But because no two businesses are the same, the owners have a great deal of flexibility in how they are paid and how they extract value. I thought we should dedicate an episode to that topic. More specifically, we will discuss how an owner can reduce their income tax liability. To help me unpack this topic is Michael Davis, CFP and Vice President of Sales for Creative Retirement Solutions, a third-party administrator for retirement plans. Michael, thanks for being here. Thanks for having me, Andy. So let me start by setting the stage here. We're talking about small businesses. These are most often organized as a sole proprietor or an S corporation. I typically find that the sole proprietors are smaller businesses. They can have employees in addition to the owner, but the number of employees is generally smaller in number than the S-corps. One pretty big difference between the two is how the business reports its profits and whether those profits are subject to Social Security and Medicare. With a sole proprietor, business profit is reported on Schedule C, where an S-corp reports income on a form 1120S. Michael, do you care to elaborate?

SPEAKER_02 1:31

Yeah, this is all a balance that we tend to see uh business owners and their CPAs doing. You know, quite often, you know, it all comes down to earned income tax. So regardless of what type of entity, how you're taxed, what often people are trying to do is avoid payroll taxes or what is often called payroll taxes. That's Social Security, Medicare, you know, your typical payroll taxes, which amounts to about 15%. So there's a very real reason that a lot of times we're trying to we're trying to minimize the the earned income, whether it's on a Schedule C or through W-2 income.

SPEAKER_01 2:08

So I think that's a pretty, pretty important point. And let me hammer this point home. So let's say a sole proprietor has$100,000 in profit net of expenses. So that's, you know, their phone bill, their paper, um, maybe an employee, something like that. The IRS views this person as an owner, but also as an employee. Employees that work for companies, for example, see deductions on their pay stub for FICA, which is Social Security, and then they'll also see deductions on their pay stub for Medicare. These are 6.2% and 1.45% of their pay, respectively. What most employees don't know, because they're working for an employer that is not them, is that the employer is also paying the same. So in total, as Michael said, about 15.3% of wages, or in the the case, this case, it's net business profit, is owed by the sole proprietor in the form of self-employment tax. This is$15,300 in my in my$100,000 example, in addition to any federal, state, and local income taxes. Is the S-corp owner taxed differently?

Reasonable Compensation And Its Tradeoffs

SPEAKER_02 3:14

Right. So the so the S-corp profit will be subject to federal, state, and local income taxes, but it's not taxed for Social Security or Medicare. So so yeah, it's slightly different. Uh an S-corp owner is going to take part of it uh as earned income and then the other part as profit. And that profit piece is still taxed, just not with the FICA Social Security, the payroll taxes.

SPEAKER_01 3:38

Got it. So there's an advantage to the S-corp over the sole proprietor because the sole proprietor ends up paying payroll taxes. We're calling them payroll taxes, but Social Security Medicare on their net profit, where the S-corp person can say, okay, for a second, we're going to assume that the S-Corp owner pays themselves nothing in salary. And that's, I would say that's a no-no, and we'll get to that in a second. But let's just say that the S-corp owner does not draw a salary. All they have is profit. And that profit, you're saying, that is not subject to Medicare or Social Security.

SPEAKER_02 4:15

Correct. But what would then keep someone from only doing that? Every every sole proprietor would then do that. Uh, so we have something that the IRS calls reasonable compensation. So in these instances, each uh people are typically working with their CPA to determine what do they have to take to keep the IRS off their backs. So what's reasonable compensation for running that business? And once we have that number, that would be subject to everything.

SPEAKER_01 4:42

Gotcha. And I will say, you said these clients are typically working there with their CPA to uh determine reasonable compensation. A lot of CPAs will try to make that reasonable compensation. I call it not reasonable, they will make it as low as possible to try to save their clients as much as possible in taxes. But if you have someone, let's say that they they are the owner and president and CEO of a 30-person company and they have employees that are paid$100,000 a year. If that owner is paying themselves$50,000, I would say that's not really reasonable compensation. So you do need to be careful with that. But the point in all this, the tax deductions we're going to talk about through different retirement plan strategies, they're not based on profit. They're based on compensation. So while you could, in theory, dial down your compensation to save on payroll taxes, by doing so, you're also going to limit your ability to contribute more to retirement plans. And we'll get to that in a second.

SPEAKER_02 5:50

And that's the downside. And a lot of times we work with CPAs to when we run into a situation where we have a business owner and we're we'll talk about this in a few, but when we have a business owner that wants more deductions and wants to save for their own retirement, quite frankly, having a very low earned income really limits how much they can contribute.

Ditch Wasteful Spend, Use Retirement Plans

SPEAKER_01 6:09

Right, right. And it's important that the CPA be on the team, if you will, that the financial planner, someone like Michael, the TPA, um, and the client's accountant or CPA, they're all uh on the same team and they understand the benefits of doing different things because a lot of CPAs will at the end of the day try to make the amount that the client pays in taxes as low as possible by simply keeping compensation low. But as you as you pointed out, one of the employees' goals or owner's goals is to maximize a retirement benefit down the road. If they just continually pound down their compensation, they may not get anywhere. And their social security contributions are going to be very limited as well. Therefore, their social security benefits, when they're able to take those, will be low as well. So one strategy that is very common, but I would say not effective, is simply spending all the profit to avoid paying taxes on it. I see this all the time. The business has a great year, doesn't matter if it's a sole proprietor or an S-corp. The owner goes out and buys things that are either going to depreciate in value or they don't need them at all. So let's explore a more savvy approach and talk about stashing some of the money away for retirement. Here you have something to show for the profits and you lower your tax bill too.

IRA, SIMPLE, And 401(k) Limits

SPEAKER_02 7:35

Yeah, and that's where, like you said, we see people buying equipment they don't need. How about saving for your retirement instead? And what we sometimes see, the first thing sometimes people think about, okay, let me contribute to an IRA. The problem with an IRA is the limit's$7,500. So if you have someone that makes$150 or$200,000 or more, you know, that doesn't even put a dent in it. Sometimes people open a simple, which will allow them to put in, if they're over$50,000,$21,000. And that can help too. But the 401k typically um is what's utilized. And that's because we can either get between somewhere between$24,500 if someone's not 50 years old, or$32,500 put away in the 401k, plus business uh matching or business contributions into the 401k. So it's dramatically more than what we can get them in in other types of retirement plans.

SPEAKER_01 8:32

And the total contribution that can be made to say an owner's 401k from their own salary deferrals, which you mentioned, plus the employer contribution, which could be match or profit sharing, what is that maximum?

SPEAKER_02 8:47

That can get us up to about 80,000 if you're not sold. Okay. So really significant. And again, that's the problem. A lot of times people and sometimes we'll have CPAs that say a CEP or a simple, and those are almost for someone that's making even$150,000. That that is never the right solution.

Total 401(k) With Profit Sharing Math

SPEAKER_01 9:06

Yeah, it's just not enough. I think a lot of folks think that only the big companies have 401ks. The rules are complicated, and there's this myth that they're expensive to implement.

SPEAKER_02 9:15

They're not even really complicated for employers. So we do a lot of 401ks for sole proprietors with no employees, what what people sometimes refer to as solo 401k bonds.

SPEAKER_01 9:25

So what do those costs to set up or anything?

Costs, Myths, And Solo 401(k)s

SPEAKER_02 9:28

So somewhere between$1,300 to set up and ongoing between, depending on how many employees we have, between$1,200 and$2,500 a year. Gotcha. And when you're talking about the tax savings on that$80,000 alone, it's a no-brainer. So the only more complicated thing, the only comp more complicated thing really about the the 4K is a company has to hire a firm like us to do their compliance work. So you're paying us a couple thousand dollars, but the difference in what you're saving is dramatic.

SPEAKER_01 9:58

Right on. You know, as I said, if you weren't doing this, you'd be spending that money on in a piece of equipment that's going to be worthless in five years. If you if you plan on selling the business five years from now, the buyer is not going to give you anything for that equipment you just bought. But if you put the money in a 401k, at least you have something of value outside of the business that you can walk away with.

Tax Credits For Starting Plans

SPEAKER_02 10:23

Correct. And and the other thing is that all of the employer deductions are top line deductions. It's just like them paying rent or buying a piece of assuming. That's not going through payroll. So anything they're making on behalf of the employer is as efficient of a deduction as you're going to find. Sorry, the other thing to note when talking about the fees, a lot of times, if there are any other employees other than the owner, the employer will be eligible for tax credits too to help offset those. Not only the cost of running the plan, but even the cost of making contribution towards the other employees will get them tax credits.

SPEAKER_01 11:00

Really? Tax credits based on contributions to non-owner employees.

SPEAKER_02 11:06

There's two things. Yeah. You'll have tax credits for our fees for the fees you end up paying to set up the plan and run the plan for three years. But then even after that, for a period of up to five years, you will get tax credits for the contributions you're making for your employees. So effectively, it would be the government making some or all of the contributions for those employees.

Stacking Employer Deductions Strategically

Intro To Cash Balance Pension Plans

SPEAKER_01 11:28

It's like no downside. Why wouldn't you do that? You just have to listen to this episode so you know how to do it. So it would seem like at a minimum, a business owner could be saving on Social Security and Medicare taxes if they operated as an S-corp, plus reduced taxable income by, as Michael said, at least 24.5 to 32.5, depending on your age, plus more, say$80,000 if you're an owner contributing to the plan as an employer. So it seemed like at a minimum, a business owner could be saving on Social Security and Medicare taxes if they operate as an S-corp, plus reduced taxable income by$24,500 to$32,500 by making a contribution to the 401k as an employee, not the owner piece of it. But as we talked about, the actual limit in contributions to a 401k with profit sharing is between$72,000 and$80,000. So could they potentially save more as an employer by offering a profit sharing plan?

SPEAKER_02 12:31

Yes, that's exactly the$80,000 is where we get with the profit sharing plan.

SPEAKER_01 12:35

Another tool that we've used here at Keeler and Adler is the cash balance pension plan. These make a ton of sense for businesses with a lot of profit, an owner that is older than the rest of the employees, and an owner that has high wage income from the business.

Why Cash Balance Works For Certain Owners

Defined Contribution vs Defined Benefit

SPEAKER_02 12:49

Correct. Or owners that have no employees. So again, earlier I said we do a lot of formal K plans for sole proprietors who don't have any employees. True. We can do cash balance plans for those two. So essentially, the IRS calls we refer to formal K plans and profit sharing plans and CEPs and simples. We refer to these as defined contribution plans. What that means is we're limited by the amount that we can put in, whether it's an employee contribution or employer. And then that money grows depending on how we invested it and what the fees are. And there's another kind of plan that predates formal K plans, and that's a pension plan. And people think pension plans are dead. There were more pension plans started in 2025 than there ever were in 1940. Wow. It's just instead of Fortune 100 companies, it's companies that don't have a lot of employees. Um up to I'd say 20 or 30. Uh but quite often it's a really a slam dunk if we have no employees or six, eight, 10 employees, especially where we have situations where we have older owners and owners that make a lot more than the employees. So the only key difference in that word cash balance pension plan is that we're we're also not stuck like an old pension plan in promising people benefits bits forever. Instead, it it kind of works similar to a defined contribution plan, even though it's not, in that at the end of the when an employee leaves employment, they have a balance that then they roll with them, just like they'll roll their full K. So what we're really promising the employee is to use an actual calculation to put in the same amount of money, but we put it into account, they get a statement once a year. And at the end of the day, what they're taking is whatever that balance is. And there's no no promise to pay them until they are, you know, until they pass away or their spouse passes away, unlike a traditional pension plan.

Large Company Pensions vs Small Plans

SPEAKER_01 14:40

And so the the old pension plans, let's say it was Studebaker. I think that there was a big case with Studebaker and their pension plan. You know, when you have, and maybe Studebaker didn't have 300,000 employees worldwide, but like a General Electric or uh ATT, the reason that their pensions more or less disappeared and they replaced it with a 401k is because they their uh employee base became older, requiring larger contributions, and the employer more or less had to make contributions on behalf of those older, aging out employees. It got to the point where they just couldn't afford to do it anymore. But as Michael's saying, if you have a sole owner, it's a you know one-man band, then it's a no-brainer because the only person you're funding for is that person. And even if you had a smaller employer where you had that older owner, high income, and everybody else, the other five people or 10 people are lower income, younger, it still makes a ton of sense because as Michael's saying, you're funding for a benefit. So the IRS really doesn't have a limit on how much you can contribute. So an actuary is involved, right? Say a 55-year-old owner making$150,000 a year wants to retire at 65. How much would he be able to contribute to a cash balance plan each year to achieve an income of$150,000 a year in retirement?

SPEAKER_02 16:10

That number would depend, but um, typically somewhere between$150 and$177,000,$170,000 a year that they would can end up putting into the plan in addition to the$80,000 that we just talked about, getting them into the profit sharing plan.

Contribution Potential And Actuarial Targets

SPEAKER_01 16:24

And so, yeah, so let me break that down. So this is an S-corp, okay, and the owner pays himself or herself a salary of$150,000. And it's important, as I said, that there be a salary, a reasonable salary. In this case, it's a nice beefy amount. But outside of the salary component, there's profit. So there's money sitting in a checking account, operating account at that business. The at the end of the year, that S-Corp owner is going to pay income taxes on all of the profit. So the idea is to lower the profit. So as Michael's saying, you've paid already paid yourself out of the business$150,000 in salary, but you've got$500,000 sitting in your checking account. You may be able to contribute$150,000 or even$170,000 to the cash balance plan that year to get you on track to fund that retirement benefit. And it does kind of blow the mind because we actually have a cash balance plan here in our office, Keeler and other family wealth. And when I see the amount that I can contribute is higher than my salary, I'm like, how's that possible? Well, because they have really very little to do with each other. We're funding for a future retirement income benefit. I have to have compensation to sort of, you know, base something on, but that's how the allowable contribution can actually exceed what you're paying that person. It's so wild.

Allocations With Employees And Vesting

SPEAKER_02 18:01

This podcast would get really boring if we weren't really went into the math or we had an actuary in here to scratch it. That's not. But we have someone at 65 or 70, and the numbers get really dramatic. So it's all based off age and income. And I think the important thing for people to know that quite often, especially if we have a low number of employees, obviously, if there's no employees, 100% of the money we're putting in is going to the business owner. But when we start to have employees, we can still typically get, we can often get 95, 96% into that business owner's account. Right. So the total putting in, instead of paying taxes at a 40% tax rate, um, instead of paying that tax, we're giving the employees five, six percent, seven percent. So when we have those illustrations that are that that favorable, it becomes a no-brainer. Yeah. Them buying a truck that they don't need.

SPEAKER_01 18:53

Exactly. Exactly. Most listeners would understand that if the end of at the end of the day, the goal is to fund retirement income of a certain dollar amount. Let's say it's$150,000 a year starting from age 65 until age 85. The question becomes how much needs to be in that pot to provide that$150,000 a year in income for 20 years? And the the answer is a lot. So obviously, as Michael said, somebody that's 70 years old, a 70-year-old owner, the amount that they would need to contribute in a really short window of time to build up a nest egg that would provide that income, it's going to be huge.

Designing To Budget And Scaling Contributions

SPEAKER_02 19:44

300,000 plus business top line deduction.

SPEAKER_01 19:47

Yep. Yep. But if that person has a 24-year-old employee earning$50,000 a year, that 24-year-old employee has a well. What 40-year time horizon? So, how much would need to go into a bucket each year for 40 years instead of two years to fund that nest egg? It's obviously a much lower number. So, as Michael said, you know, the goal is if you had$200,000 of cash sitting around that you wanted to do with, this is$200,000 of profit that you would be paying taxes on at 40%, how can we get as much of that$200,000 into the owner's retirement account and as little as possible into all of the other employees? And if you could get, say, 70 or 80% of that$200,000 into the owner's account and the rest goes to the other, you know, 10 employees, that's not a bad deal.

Flexibility: Freezing And Amending Plans

SPEAKER_02 20:50

And the other thing that's important to note is that the contributions have a besting schedule on them. So employees have to be there in order to earn it. And the other thing I think is important, sometimes throwing around this big a numbers, we can scare people. We're talking about at 100 miles an hour, right? We're talking the maximums. Pension plans can always be designed to provide less benefits. So when we start having consulting conversations with a business owner about a pension plan, is anytime they say, well, okay, we just we just did a profit sharing 401k design that got$80,000 put away for me. And these numbers look great. What else can I do? At that point, we start to ask them, what's your budget for that? If it's maximum, then we're going to go to some of the maximum numbers we've been talking about, Andy. But a lot of the times a business owner says, Well, you know, I've got a couple kids in college still, or that's too much, or we don't have that much profit. Okay, we can back that down to your 80,000 plus 50 or 80,000 plus 30. Right. So, you know, some of the numbers we're throwing around, I guess I want to be cautious and not get someone too scared. Well, I don't have 300,000 to plug into this. Yeah. The number can be scaled back as much as someone wants to. The important thing to note is this is the step that sits on top of when someone's already maxing out what we can do in the defined contribution plan.

Practical Funding Ranges And Timelines

SPEAKER_01 22:09

Right on. So you you have a 401k, let's say with a profit sharing bolted onto it, or it's actually technically the opposite. It's a profit sharing plan with a 401k uh option. And you do that first, you maximize that, then we start looking at the cash balance, and the two plans kind of test together. They they sort of work off of each other. As Michael's saying, you know, while we're using huge numbers, and somebody could say, my kids are in college, so I only have$50,000 that I want to save taxes on and to I want to play with that. But the beauty is so the Studebakers and the ATTs and the Delta Airlines, those plans were very rigid. And the employer had a certain funding standard that they had to adhere to year in and year out. They fall on hard times, they go through a recession, but they still have to make those contributions. My understanding is now you can literally go back and amend your cash balance plan document every year and adjust the funding formula. Is that accurate?

Setup Costs, Admin, And ROI

SPEAKER_02 23:17

Yes. Any type of defined benefit plan comes with what the IRS says, these are permanent. So they're certainly not intended to be a profit sharing plan where we're doing it one year and not the next. Certainly in instances where we have business situations, we can absolutely pause those. So a perfect example is when COVID hit. We went to every one of our pension clients and we asked them, hey, do you want to freeze your plan? We froze pretty much every one of our plans. Most of those before the end of the year said, hey, things weren't as bad as what they could have been. We want to unfreeze them and we want to do that retroactively. Some said we want to unfreeze them, but let's unfreeze it starting with next year, 2021. So there's absolutely flexibility, just like you've heard in the past about traditional pension plans being frozen, you know, and that's always like the big thing. Employees are frustrated because their plan was frozen. Well, even with cash balance plans that are different types of pension plan, those can be frozen when we need to. And they could be frozen one year, unfrozen the next. You know, if someone did that for eight years in a row, one year and that the IRS probably would look kindly on that. But normal situations, especially when we have business situations absolutely freezing this, a cash balance pension plan is no different than freezing a regular pension plan and then restarting.

SPEAKER_01 24:32

Outside of freezing and restarting, though, let's just say, for example, owner is seeing very high profits, wants to save taxes, but has the kid in college, has fifty thousand dollars. Four years later, kid graduates and profits are through the roof. Now he has he says, I have 200,000 I want to put away. I'm uh under the impression that you can adjust the funding formula to increase his contribution to the cash balance plan from 50 to 200.

SPEAKER_02 25:03

Correct. No differently than we could adjust how much they're putting in for profit sharing or what they're matching their employees or themselves. You're exactly right.

SPEAKER_01 25:11

So it's very flexible. Yes. And and I one of the questions I get from people when I'm talking with them about the cash balance is well, we want to do this for at least three years. If if you can't do this for three years, and it doesn't have to be the exact same dollar amount all three years, but you need to contribute to it for three years. And I don't know if that's greater advice or not. But usually the question I get from folks is, am I locked into this? Is there flexibility in my contributions? What if next year isn't so good? And the answer is there's a lot more flexibility than you you might believe there to be. So, what do these things cost to establish and run compared to say the the profit sharing? You gave me some rough numbers there. If I wanted to set up a cash balance plan, how much how much would that cost?

Closing, Disclaimers, And Contact Info

SPEAKER_02 25:58

So, again, just to go back to what I said earlier to kind of review a full K plan costs you about$1,300 to set up and then$2,500 a year to administer for like a 10-person company. Cash balance plans with the actual involvement, they're definitely more complicated and more uh labor intensive for us to do the consulting on. So you're talking$2,000 to set up plus about$3,700 for a 10-person company. So again, you know, the two plans together is because typically we have we have both.

SPEAKER_01 26:25

Yeah.

SPEAKER_02 26:25

So a person plan, about$3,300 to get it set up and about six thousand dollars ongoing um expenses for consulting, which obviously again, those are tax-deductible expenses. And when compared to what people are saving the taxes, it's huge, the fees are a non-issue.

SPEAKER_01 26:41

Yeah, not a big deal. Let's say somebody's even they're just maxing out the profit sharing in 401k and have just a little bit more in the cash balance,$100,000 tax deduction at a cost of$6,000, which it's actually a$106,000 tax deduction. So it's a it's a no-brainer. So, Michael, thanks for making this one of the most valuable episodes we've done thus far, minute for minute. And my previous guests, don't be offended by that. As always, we thank our listeners. I'm Andy Keeler, and this is Financial Opportunities Uncovered, brought to you by Keeler and other Family Wealth. If you have questions on anything you heard in this episode or have an idea for a future episode, connect with us on LinkedIn or email me at andy.keeler at kanwealth.com.

SPEAKER_00 27:38

The opinions expressed in this program are for general information purposes only and are not intended to provide specific advice or recommendations. It is only intended to provide education about finance, tax, retirement, and related planning topics. To determine which investment strategies are appropriate for you, consult your finance, tax, or legal advisor prior to implementing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always, please remember investing involves risk and possible loss of principal. Please seek advice from a licensed professional. Keeler and Adler Family Wealth is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Keeler and Adler Family Wealth and its representatives are property licensed or exempt from licensure. No advice may be rendered by Keeler and Adler Family Wealth unless a client service agreement is in place.