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EPISODE 94: The S Corp Owner and Employee Benefits

Casey is joined by Steve Levy, CPA, to discuss practice owners that operate as an S-Corp and how employee benefits play into it.

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EPISODE 94 TRANSCRIPTION

Announcer:
Hello, everyone. Welcome to The Millionaire Dentist podcast brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices, to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue, and may not be safe for work.

Casey Hiers:
Hello and welcome. This is Casey Hiers back at The Millionaire Dentist podcast. In studio, special guest, Steve Levy. I have given you the nickname Pipes. So Steve Pipes Levy, and you're going to be singing the national anthem at an NFL game coming up. Is that correct?

Steve Levy:
That's right. This Thursday, me and my group are going to get our pipes going and sing that national anthem.

Casey Hiers:
I love it, I've heard it before. You've got an angelic voice, deep voice, powerful voice, too powerful for this podcast. You're just using your civilian voice today.

Steve Levy:
Exactly.

Casey Hiers:
But no, I'm excited about that. Our co-host Jarrod Bridgeman, he's just given us the reigns to go where we want today, so let's do it. He's sitting this one out and we're going to get at it. So Steve, I wanted to bring you in as an attorney, as a CPA and an international man of mystery, if you will. I wanted to talk about the S corp owner and employee benefits. So this goes to ownership and structuring of ownership, and there's so many different options out there.

Casey Hiers:
Now, I'll admit ahead to look up what the definition of an S corp is. And while most people kind of know what it is, the definition threw me for loop. An S corp is a corporation that meets the IRS rules to be taxed under chapter one, sub chapter S of the internal revenue code. I challenge any listener that knew that.

Steve Levy:
Yes, that would not be common knowledge.

Casey Hiers:
Right. So why is this topic important, Steve?

Steve Levy:
Well, most companies and most practices are organized as an S corporation. The benefits of being that, is that especially you do not have to be taxed twice on your earnings, first as you earn them and make net income, and secondly, as you take them out. Versus for a C corporation, a regular corporation, there would be a tax when you make the income and then when you take it out as dividends. So, the S corporation is by far the most popular way to structure your entity in order to take advantage of one taxation and the earnings passing through basically onto your 1040.

Casey Hiers:
So in your time, as you look at specifically here, dentist and specialist and practice owners' taxes, prior to coming to us, how often do you see the proper structure versus a structure that maybe they're not reaping all the benefits from a tax and otherwise? 50/50, when people come to us, what's that look like?

Steve Levy:
Most of them have set up this S corporation. Some of them need to tweak things with their energy structure. So, when they come to us, we'll get them over the hump as far as a proper structure. So for the most part, they may come in with the proper structure. They may not understand why they have, and so this topic is relevant as to, okay, here's some special treatment for especially owners that own these special types of entities.

Casey Hiers:
So, who is considered an S corp owner? What are those characteristics or what does that look like?

Steve Levy:
It's basically, if there's 100% owner, that's an owner. If it's 100% owner and that owner has a spouse, the spouse is also considered a 2% owner, an owner. It can be as little as 2% to be an owner. So, most of the time we'll see 50/50, or maybe one third owners, those all fall into the definition of a 2%, S corp shareholder.

Casey Hiers:
Okay, okay. So partners, if it's 2% or above, you can slice it up as many times as you want to, to be under an S corp.

Steve Levy:
Yeah.

Casey Hiers:
Okay. So, how is owner shareholder insurance treated?

Steve Levy:
With health insurance, so that's the big one we see that's different from a regular employee, because that's what we're doing here. We're distinguishing how we treat the owner differently from a regular employee. So, for health insurance, typically if the company is going to pay health insurance on behalf of the employee, they're not going to include that in income. It's a benefit, it's the best of all worlds. It's they're not tax on it, the employee isn't and the company gets a right off. Perfect, perfect situation there.

Casey Hiers:
Well, that's funny because so many practice owners I talk to, they hate taxes. Most people want to pay less taxes, thinks there's a trick. There are no tricks, but entity structuring, as you just mentioned and avoiding paying multiple taxes or what you just mentioned with insurance, that's a little nugget for practice owners, right there. It comes down to the details of structuring and you can save.

Steve Levy:
Yeah, certainly. And so with the regular employee, we've got the company paying, company gets the write off, employee doesn't get taxed on it, or have it included in their compensation. However, for an S corp shareholder, it's a little different. They still get benefit, but there's some wrinkles to it. The first wrinkle is that health insurance premium gets included in compensation of the S corp shareholder and that's an important thing to do, and something that's often overlooked. That's the first step.

Steve Levy:
Then, because the corporation pays it as compensation, they get the write off there. Now the drawback is, if it's in compensation of the shareholder, it's in their W2, they get taxed on it. There is good news here, as long as it is in that compensation of the shareholder, that health insurance gets to be written off on the 1040 of the shareholder. So, in the long run, there is a deduction. As long as the rules are followed, they get it on their 1040.

Casey Hiers:
Okay. How about auto expenses? I know that's a favorite among practice owners, is to potentially intersect some of those details. So, how are auto expenses treated under this corporation?

Steve Levy:
Well, it depends on if the auto is in the business or not in the business. Typically, it's not in the business, then what we do is, and what the rules allow, is for the owner to let us know how many miles have you driven for business in your personal auto? Once they give us that, then we can actually write it off on their business in a way of like a reimbursement of the business miles they've taken.

Steve Levy:
Now, let's say it's in the business. We see 50/50, both ways, the autos in the business. Usually it needs to be used 50% or more for business purposes, which that's not that hard to fulfill. But of course, they're not just using it for business. They're using it both for business and personal reasons. So, if it's in the business, they have to tell us how much they're using for personal, and those miles multiplied by typically the standard rate mileage rate, which is in the 55 cent range typically, it varies based on your year to year, but those personal use miles need to be included on their W2 and they get taxed on it. So, it differentiates based on if the car is in the business or if it's not.

Casey Hiers:
From my perspective, it's interesting that so often people get tied to the weeds of their automobiles in the business or their kids and all ... While that all needs to be structured correctly, there's so much more lower hanging fruit, or more impactful ways that we find practice owners, tens and twenties and thirties of thousands of dollars, through just not having good tax management. But yet the focus is always on, I don't want to say little, but some of kids, the autos, they're focused on that, where in reality, there's $38,000 that you're not getting, that you're paying unnecessarily in taxes because you don't have that dental-specific view or folks that get what a practice owner needs and how to structure it correctly. So, I'm glad we covered this, but it's fascinating that again, some of those things you hear are just not as impactful as people think.

Casey Hiers:
So, what about other employee benefits when you're looking at the S corporation owner structure? What are some of the other employee benefits?

Steve Levy:
Well, other ones that we typically see, and these are mainly the ones that are not subject to some of those special rules of an S corporation owner. So certainly, qualified retirement plan contributions. It doesn't matter if they're an owner or not, they certainly get to write it off on the company's business. They also are not yet taxable. They go into the plan, the retirement plan of the employee, regardless if it's a regular employee or owner. Another thing that corporations, S corporations or regular corporations, can offer, and this is not something we see often, but it's something that they can offer is qualified, educational assistance. You can offer that tax free to all your employees up to $5,250 as it currently stands. That changes over inflationary adjustments.

Steve Levy:
Now, the issue is that you cannot provide more than 5% of that to the S corporation owners, spouses, or dependents. So, it can't be solely focused on the owners, which the owners want to say, "Hey, I really like this. I want to get tax benefits from it. I want to be the only ones that get it." Well, that's not going to fly, that's not something you can do. It's got to be offered throughout and you have to watch how much you're giving yourself as an owner, so that you can still provide these benefits.

Casey Hiers:
So using that to send your child to a premier private school would potentially be a red flag to the IRS?

Steve Levy:
Exactly, exactly.

Casey Hiers:
But then again, if you had a hygienist that wanted her MBA or his MBA, that falls under the letter of the law, that's acceptable, but then you have to ask why is your hygienist trying to get an MBA?

Steve Levy:
Sure. But it can also be any kind of other furthering of their schooling, so-

Casey Hiers:
Certifications and things of that nature.

Steve Levy:
Yeah.

Casey Hiers:
So, there are some certifications out there or some furthering of their ...

Steve Levy:
Mm-hmm (affirmative), yeah.

Casey Hiers:
Okay, that makes sense.

Steve Levy:
Yeah, absolutely. Another one that we commonly see is dependent care assistance. You can have it tax free up to $5,000, but again, there's a special rule that it's called discriminatory, which favors likely the owners, is that it can't be more than 25% of the benefits paid, provided to those S corporation owners. So, that's a easier hurdle to overcome. It just can't be more than 25% to the owners. So, if you've got an overall plan, then you'd certainly want to offer it to everyone, but not as much to the owners.

Casey Hiers:
Are there any pitfalls that you see when practice owners go to set up their entities or how they're set up? Do you see any pitfalls that people commonly fall into or not so much?

Steve Levy:
Oftentimes we see that the corporation is considered a personal bank account and that raises all sorts of issues in that it's no longer a personal bank account. Now, you can take money out of it, but can't be charging all sorts of personal ... I mean, you can, but it can't be written off. It's considered a distribution, it's not deductible. You're really getting no benefit from it and really confusing things.

Casey Hiers:
I wanted to say the juice isn't worth the squeeze, right?

Steve Levy:
Yeah.

Casey Hiers:
So, there's some undue risk that a lot of practice owners, but just owners of business in general, there's a psychological stroke or release of dopamine almost that folks get, if they feel like they are gaming the system or, "I'm doing this, I'm getting my carpets cleaned for my home office, but they're also going to do the rest of my house." And people feel good about it. The point I want to make is there's so many of those little areas that A, aren't worth it. B, they raise red flags, you're opening yourself up to risk and vulnerability. And again, most of the time we get in there and find significant areas of tax savings, whether it's how income is structured, retirement planning, different entities, spouses being paid too much. There's so many areas that we'll go in and help lower people's tax burden by tens of thousands of dollars in every year, which is ultimately what they want and you don't have to take all that risk. Is that a fair statement [crosstalk 00:14:05]?

Steve Levy:
Yeah, definitely. We're going in, folks are coming over to us and we're taking a look at what's been done before. We're always seeing what can we do maybe to fix things, or whatever, or restructure, so that they can get an immediate bang for their buck when they're coming over?

Casey Hiers:
Well, the nice thing is, our new clients, we look back a couple years at their tax situation and clean a lot of things up. This is the end of the year. A lot of times people are meeting with their accounting team or CPA, and they're getting that news of you owe some more money, which is frustrating. Sometimes you're getting the big refund. That should be frustrating too, you want the monthly cashflow. We talk about that all the time, but I thought this topic was timely. Anything else for our listeners around this topic?

Steve Levy:
I would say, if you're going to offer fringe benefits, certainly in these times of trying to get the best employees, the best staff, certainly consider it if it makes sense. Just know there are special rules behind it, especially when it comes to offering those fringe benefits to yourself.

Casey Hiers:
Some of the education, some of the auto, some of those things that you mentioned, no, that makes sense. Well, Steve, thank you. I appreciate your expertise on this. I'm sure our listeners do as well and can't wait to hear you belt out the national anthem at an NFL game, sir.

Steve Levy:
Thank you, thanks.

Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dennis podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why year after year, they retain over 95% of their clients. Thank you again for joining us and we'll see you next time.