Mom and Pop Shop, 162 bonus

[scagnt83]

Do you think the benefits of a SERP outweigh the simplicity of a 162 plan?

Depends on the situation. A 162 can be complicated if you want to make it so.

Like I said in our pm. If you compare a Restricted Access 162 Double Bonus, to a SERP; the biggest difference for the business is a small deduction now, vs. a larger deduction in the future. They both retain the employee by providing a monetary incentive in the future.

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Can you talk about 2 and 3 alittle bit more?

#2 is fairly simple. Instead of providing a 162 Bonus via ordinary earned income on the W2. The Bonus is provided on the K1 level. As long as it is reasonable and customary it is allowed. By not being included on the W2 level, the funds avoid FICA taxes.


#3 is rare. An AAA account is a business account of retained earnings that have already been taxed. The most often place you will see this is a former C-Corp who is now a SCorp.

Its something ive never done and can be complicated from a planning standpoint. If the account goes to zero there can be some tax ramifications I think.

 

[Full Throttle]

There are 3 options for a S-Corp Owner/Employee if they want to 162 Bonus.

1. Bonus on the business level as regular W-2 Income. This is essentially a wash. Although I have heard it debated as not before.

2. Bonus on the K1. This will avoid FICA Taxes on the bonus amount.

3. Bonus from an Accumulated Adjustments Account if one exists. (rare)


Obviously #2 is the most commonly used method. Many agents are not aware it exists. (as this thread has shown)

A LLC basically has the same options as above.

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There are multiple options here. A lot of it just depends on what priorities the father has.

Often a SERP can make more sense. It keeps the funds in the business and allows the owner more control. Or a combination of both can work too, and sometimes will give the son/employee more incentive.

Basically the father just self funds the kids buyout via the business. And if the kid fails to take it over then the owner/father still has the buyout funds inside the business.

Often there is a salary continuation agreement involved in a closely held buyout. Or they can just retain a portion of ownership and reap dividends.

Its a very broad question with many possibly answers.

Good post. When I said it is the same as paying out of their personal checkbook, I meant there is no inherent tax advantage for the owner of the S-corp. Without taking a 162 bonus, I can still take income as W-2 or K1, the life insurance makes no difference.