S corporations are a top pick for small businesses because they offer pass-through taxation. About1 5 million small businesses in the UK choose this route. They can save over £7,000 a year by splitting profits into salary and shares1.
Smart S corporation owners use advanced tax planning to save more in 2021. They can optimise the Section 199A deduction and make smart business groupings. These moves help cut down on taxes123.
Understanding S corporation taxes and keeping up with changes can lead to big savings. This guide will cover key strategies for 2021. Learn how to improve your S corporation’s tax this year.
Understanding S Corporation Tax Basics and Benefits
As a UK business owner, knowing about different tax structures is key to better finances. The S corporation is a popular choice. It’s a pass-through taxation model with special benefits4.
Pass-through Taxation Explained
S corporations pass profits and losses straight to shareholders’ tax returns. This avoids the double tax hit that C corporations face5.
Basic Tax Advantages of S Corps
- Save on taxes by not paying the 21% corporate rate6.
- Easy asset transfers and a solid business reputation4.
- Payroll tax savings on what owners earn4.
Eligibility Requirements for S Corp Status
To be an S corporation, a company must have 100 or fewer shareholders. These must be eligible individuals, trusts, or estates4. The business needs only one stock type and must file Form 2553 with the IRS4.
In the UK, the closest to an S corporation is a limited company. It can make tax elections for pass-through benefits like S corps in the US5.
“S corporations offer a unique tax structure that can provide significant financial advantages for UK business owners, particularly when it comes to avoiding double taxation and potential payroll tax savings.”
Optimising Salary-Dividend Split Strategy
As an S corporation owner or a UK limited company director, finding the right balance between salary and dividends is key. Paying yourself a fair salary means you get the tax benefits of an S corporation or limited company7. This way, you can save a lot of money on taxes8.
But, the IRS and UK tax authorities want you to take a “reasonable” salary to avoid tax loopholes8. Figuring out the best salary-dividend split needs looking at your business, role, and profits9.
By getting the salary-dividend mix right, you can cut down on taxes and follow the rules8. This lets you keep more money for your business or personal goals8.
| Tax Consideration | S Corporation | UK Limited Company |
|---|---|---|
| Salary Subject to Employment Taxes | Yes | Yes |
| Dividends Subject to Employment Taxes | No | No |
| Reasonable Salary Requirement | Yes | Yes |
| Tax-Deductible Salary Expense | Yes | Yes |
| Dividend Tax Rates | Applicable Individual Income Tax Rates |
|
By balancing your S corporation salary and dividends or adjusting your UK limited company’s split, you can significantly reduce your overall tax burden. This way, you keep more of your profits789.
“Proper tax planning is essential for S corporation owners and UK limited company directors to maximise their after-tax income and achieve their financial goals.”
S Corp Tax Saving Strategies 2021: Advanced Planning Techniques
As a British business owner with an S corporation, using advanced tax-saving strategies can greatly benefit your company’s finances. You can explore ways to make the most of the Section 199A deduction and pass-through entity tax elections in 2021 and later10.
Section 199A Deduction Optimisation
The Section 199A deduction, or QBI deduction, can offer a big tax advantage for S corporations. To get the most from this deduction, think about adjusting your W-2 wages. Also, consider splitting certain business activities to qualify for the full 20% deduction10.
Pass-through Entity Tax Elections
Choosing to pay pass-through entity tax is another smart move. It can help S corporation owners avoid paying tax on business income at the individual level. This could lead to big savings. By making this choice, your S corporation can deduct the pass-through tax paid, lowering your taxes10.
Business Activity Grouping Benefits
Grouping your business activities can also bring tax benefits. By treating related activities as one, you might get more deductions and offset losses. This is especially good for S corporations with many different activities10.
In the UK, businesses can also save taxes by optimising director’s salaries and using tax reliefs. Structuring your business to be more efficient can also help. With careful planning, your S corporation can save a lot and stay financially stable11.
“Leveraging advanced tax-planning techniques can be a game-changer for S corporation owners, unlocking substantial savings and strengthening their business’s financial resilience.”
Tax-Efficient Employee Benefits and Compensation
As an S corporation, you can offer tax-free fringe benefits. This way, you can boost shareholder-employee pay without adding to payroll taxes12. For example, health insurance premiums are deductible for the S corp. They also don’t count as income or payroll taxes for the employee12. In the UK, employers can give tax-efficient benefits like pension contributions, childcare vouchers, and cycle to work schemes13.
The Enterprise Management Incentives (EMI) scheme lets UK businesses with under £30 million in assets and fewer than 250 employees give share options up to £250,000 in three years12. This scheme helped increase companies offering equity schemes by 6% in 2020/21, according to HMRC12. Also, in April 2023, companies can offer up to £60,000 in Company Share Option Plan (CSOP) options to employees, as part of the government’s Growth Plan12.
Employers can also give tax-exempt benefits like free or subsidised meals, medical treatment to help employees return to work, and health screenings13. Other tax-free benefits include electric cars, pension contributions, working from home expenses, and annual social events14. These can help attract and keep top talent14.
| Benefit | Tax Implications |
|---|---|
| Electric Cars | Benefit in kind value of only 2% of list price in 2022/23, compared to diesel cars up to 41%14 |
| Pension Contributions | Up to £40,000 per annum are tax-free for employees14 |
| Working from Home Expenses | Up to £312 per year for employees, tax and NI exempt14 |
| Trivial Benefits | Up to £500 per annum per employee, tax and NI exempt14 |
| Annual Social Events | Up to £150 per annum per employee, tax and NI exempt14 |
| Bikes for Commuting | Provided to employees without tax or NI implications14 |
| Mobile Phones | Tax and NI exempt if only one phone or SIM card is provided14 |
By knowing about tax-efficient employee benefits, S corporations can improve their pay packages. This attracts the best talent while keeping taxes low.
Strategic Retirement Planning for S Corp Owners
For S corporation owners, planning for retirement is key to saving taxes. They can use SEP IRAs and 401(k) plans to increase their retirement savings. This approach offers valuable tax benefits15.
Pension Plan Options
SEP IRAs are a favourite for S corp owners. They can contribute up to 25% of their W-2 wages, with a yearly cap15. Solo 401(k) plans offer even more, with a 2023 limit of $66,000, or $73,500 for those 50 and older15.
For 2023, S corp owners can put up to $22,500 in their Solo 401(k) plan. Employers can add up to 25% of the owner’s W-2 wages. This boosts retirement savings15.
Contribution Limits and Tax Benefits
Timing Solo 401(k) contributions right can save taxes and boost retirement benefits15. Contributions must be made by the tax filing deadline to get deductions for the previous year15.
Planning Solo 401(k) contributions wisely can lead to long-term tax savings. It increases retirement savings for S Corp owners15.
SEP IRA vs. 401(k) Considerations
When choosing between SEP IRAs and 401(k) plans, S Corp owners should think about limits, investment choices, and admin needs16. Solo 401(k) plans offer more flexibility and higher limits, ideal for those wanting to save more. SEP IRAs are simpler, appealing to some15.
The right choice between SEP IRA and 401(k) depends on the owner’s needs and tax strategy16.
Family Employment and Income Splitting Strategies
For S corporations and family-owned businesses in the UK, hiring family members can save a lot of tax. By paying fair wages to family members for real work, businesses can move income to lower tax brackets. They can also claim these wages as business expenses17.
In the UK, limited companies can also use income splitting. But, it’s important to follow HMRC rules. Planning carefully is key to avoid big tax penalties if payments to family members are not allowed18.
- Family members over 18 with at least 10% of shares in non-service businesses might not face TOSI18.
- Payments to a spouse over 65 can also avoid TOSI18.
- Using income splitting wisely, following TOSI rules, can lower family taxes18.
There are more ways to save taxes with family employment and income splitting:
- Pension splitting lets Canadian taxpayers share up to 50% of pension income with a spouse or partner19.
- Spousal RRSPs allow up to 100% of RRSP income to be split with a lower-income spouse or partner19.
- Loans to family trusts can tax income in the child’s hands if interest is paid at the right rate19.
By using these strategies, businesses and individuals can improve their tax planning. This leads to better financial health.
Conclusion
Effective S corp tax planning helps small business owners in the UK save on taxes. They can split salaries and dividends wisely and use tax-efficient benefits. This can lead to big tax savings20.
While some US tax strategies might not fit the UK, many can still be used here. This includes planning for retirement and using family employment to spread out taxes.
Working with tax experts is key for UK small businesses. They can make sure they follow the rules and save on taxes21. Keeping up with tax changes is also important for success in 2021.
In short, a detailed approach to S corp tax planning can bring big financial gains. By using various tax-saving methods, business owners can handle tax rules well. This lets them focus on growing their businesses.
FAQ
What are the key benefits of operating as an S corporation?
Being an S corporation has several advantages. It means you avoid double taxation and get to enjoy pass-through taxation. You might also save on payroll taxes.
What are the eligibility requirements to become an S corporation?
To be an S corporation, you need to meet a few criteria. The business must be based in the US and have shareholders who are eligible. It also needs to have only one type of stock. In the UK, this is similar to a limited company with certain tax choices.
How can S corporation owners optimise their salary-dividend split?
S corp owners should pay themselves a fair salary that’s taxed as employment. Any extra profits can be given out as dividends, which aren’t taxed as employment. This can save a lot of money in taxes. But, the IRS checks to make sure the salary is fair to avoid tax evasion. In the UK, directors can also use salary and dividends to save on taxes.
What are some advanced tax-saving strategies for S corporations?
For more tax savings, S corps can use the Section 199A deduction. They can also split their business to qualify for this deduction. Another strategy is to pay pass-through entity tax. In the UK, businesses can save taxes by adjusting director’s salary and using tax reliefs.
How can S corporations take advantage of tax-free fringe benefits?
S corps can offer tax-free fringe benefits to increase what employees earn without raising payroll taxes. For example, health insurance is tax-free for employees and can be deducted by the S corp. In the UK, employers can give tax-efficient benefits like pension contributions and childcare vouchers.
What retirement planning options are available for S corporation owners?
S corps can set up retirement plans like SEP IRAs or 401(k)s for tax benefits. SEP IRAs let you contribute up to 25% of wages, while 401(k)s offer higher limits and employer contributions. In the UK, companies can set up pension schemes like SIPPs and group personal pensions, offering tax relief on contributions.
How can S corporations utilise family employment strategies?
S corps can hire family members at fair wages, shifting income to lower tax brackets. This also gives the S corp deductible business expenses. It’s important to ensure wages are fair and family members actually work. In the UK, similar strategies are possible but must follow HMRC rules.
By
By
