nplusone wrote: ↑Mon Nov 20, 2023 3:57 pm
LotsaGray wrote: ↑Fri Nov 17, 2023 8:37 pm
nplusone wrote: ↑Fri Nov 17, 2023 7:03 pm
The defined benefit plan is a retirement plan established by the company for the benfit of its employees.
If the mandatory contributions are high, then there is very little money left for salary/distribution.
This is similar to pre-Obamacare days.
Imagine that the S Corp established a health insurance plan for its 2 employees.
And next year, one employee was diagnosed with cancer and needed ICU 24x7. The insurance company paid out hundreds of thousands and hence immediately jacked up the health premium to insane levels.
The S Corp still has to pay those premiums and there is very little money left for salary/distributions.
Your health insurance analogy fails in multiple ways but you don’t seem open to the input being provided. BTW any Jobs, Gates, Musk Buffet or similar comps also fail simply because they are C corps.
Will try again in a different way… paying out 10% of corp net as salary it is probably not going to fly with IRS. But if you are a CPA I am surprised you don’t know all of this.
You are right - my Jobs/Buffett analogy is incorrect because they are C corps. I have edited my earlier post.
If possible, could you elaborte the flaw in my Health Insurance analogy?
First that simply is not how medical insurance worked pre ACA so the described situation would not occur. Thus the question is it ok by IRS simply has no meaning.
Second, even were the scenario occur as you described, you are paying a third party for a service. The provider is setting a market rate and you are choosing to buy at that price. In you case you are self dealing and setting a “price” which you solely control and has no market basis.
Third in the insurance scenario you would be buying a service. You are not directly benefitting from the premium paid. That money goes to the insurance company. They pay the doctor, et al, and you relieve the treatment. In the DB scenario you are simply passing the money to yourself. Someone else may administer the plan or be a custodian. They may take a fee cut but most of the money simply goes to you. You are paying yourself.
The DB is very apparently simply a means to pass money to yourself. At best all of the “cost” would be taxable but not SE tax but most likely IRS would see through the disguise and apply penalties while treating this indirect compensation as wages including FICA.
You ignored the easiest, simple test I proposed. Assuming your biz is a CPA firm, can you reasonably and honest claim you could hire a CPA with similar experience for the $25K wages?
Another common way to look at reasonable wages is to pay yourself at least 40% of the SCorp net. That is what many recommend as reasonable. Though I am not aware of IRS ever confirming. Certainly better chance than 10%ish you are doing.