S Corp Savings 2025

S Corp Tax Strategy 2025

Maximizing wealth accumulation through advanced retirement planning, optimized health benefits, and strategic timing of deductions.

Executive Summary

While Reasonable Compensation is the "stick" the IRS uses to ensure compliance, the S Corporation structure offers plenty of "carrots." The 2025 landscape is defined by the SECURE 2.0 Act, which has dramatically increased retirement contribution limits, and the continued power of the 2% Shareholder Health Insurance deduction.

However, operational pitfalls remain. From the "established plan" rules for health premiums to the "salary deferral election" deadlines for Solo 401(k)s, timing is everything.

Health Deduction

100% Above-the-Line: Premiums are deductible on Form 1040 AND exempt from FICA tax if reported correctly on W-2.

Retirement

Solo 401(k) Power: Contribute up to $70,000 (2025) per owner. Requires action before Dec 31st.

Timing

12-Month Rule: Cash-basis S Corps can prepay 2026 expenses in Dec 2025 to accelerate deductions.

2% Shareholder Health Insurance

The "Established Plan" Trap

You cannot simply pay premiums personally and deduct them. The S Corp MUST either pay the premium directly OR reimburse you within the current tax year.

The "Wash" Strategy (W-2 Reporting)

Step 1: W-2 Box 1
Include Premium in Wages
Subject to Income Tax
Step 2: W-2 Box 3/5
Exclude from FICA
Saves 15.3% Tax!
Step 3: Form 1040
Deduct on Sched 1
Offsets Income Tax

Retirement Planning (SECURE 2.0)

Retirement plans are the best tax shelter available. For S Corp owners, the choice is usually between a SEP-IRA and a Solo 401(k).

SEP-IRA

  • Funded By: Employer Only.
  • Limit: 25% of W-2 Salary.
  • Pros: Easy to setup, deadline is tax day (plus extension).
  • Cons: Requires high salary to max out. No catch-up contributions.

Solo 401(k)

  • Funded By: Employee + Employer.
  • Limit: $23,500 Deferral + 25% of Salary.
  • Pros: Maximize contributions at lower salary. Roth option available.
  • Cons: More paperwork. Deferral election must be signed by Dec 31.

Fringe Benefits: Taxable vs. Exempt

2% Shareholders are treated like Partners. Many "tax-free" employee perks are taxable to you.

Benefit Type Tax Treatment (2% Shareholder)
Group Life Insurance (>$50k) Fully Taxable
Meals & Lodging Fully Taxable
Transit/Parking Fully Taxable
HSA Contributions Tax-Free (FICA Exempt + Deduction)
De Minimis (Coffee, Holiday Turkey) Tax-Free

Strategic Timing (12-Month Rule)

Accelerate Deductions

Cash-basis S Corps can deduct prepaid expenses in the current year if the benefit doesn't extend beyond 12 months.

Example: It's Dec 20, 2025. You pay $12,000 for insurance covering Jan-Dec 2026.

Result: You deduct the full $12,000 in 2025, reducing this year's tax bill.

Interactive: Retirement Maximizer

Compare the maximum deductible contribution for a Solo 401(k) vs. a SEP-IRA based on your W-2 Salary.

Your Details (2025)

Contribution Limits

SEP-IRA Max
Employer Only (25%)
$0
Solo 401(k) Max
Employee + Employer
$0
Solo 401(k) Advantage: $0 more tax-deferred space.