The Business Tax Strategy Playbook: How to Structure Compensation and Retirement for Growth
Discover tax strategies we can use to optimize your compensation, retirement, and distributions as your business scales
By Michael Sicuranza, CFP®, ChFC®, CLU® and Cheryl Starr, CFP®, Affinity Wealth
How does your business pay you?
As income rises, what used to be a smart setup for your business can quietly become inefficient. The entity you chose years ago, your salary, and your retirement contributions can all shape how much of your success you actually keep.
For many, the turning point comes when taxes start feeling like a growth penalty instead of a by-product of success. That’s when structure and strategy matter most.
At Affinity, we help business owners connect the dots between tax decisions, compensation, and long-term wealth, so your growth isn’t just bigger, it’s smarter.
How to Build a Smarter Tax Strategy as Your Business Grows
As your business expands, the goal isn’t just to pay less in taxes; it’s to design a structure that supports both your company’s growth and your personal wealth. Here’s how we help you rethink compensation, retirement, and distributions to make every dollar work harder.
1. Choosing the Right Entity Structure
One of the first questions we ask when a business owner comes to us is: How are you currently structured?
Your business entity type has a direct impact on both your tax burden and your retirement savings capacity. Understanding the difference between an LLC taxed as a partnership and an S-corporation can save you significant money, but only if you make the switch at the right time.
Here's the key distinction:
· LLCs taxed as partnerships calculate retirement contributions based on your total income, including guaranteed payments and profit distributions.
· S-corporations base retirement contributions solely on W-2 wages.
If you’re operating as an LLC taxed as a partnership and earning over $400,000 to $500,000, it may be time to consider electing S-corp status to improve tax efficiency and retirement options. That said, switching too early can backfire. While an S-corp can reduce self-employment taxes, it may also limit how much you can contribute to retirement accounts.
The ideal timing is typically when the tax savings outweigh any reduction in contribution capacity, and that sweet spot varies by business. This is where having an experienced advisor makes all the difference—we can run the numbers with you to determine the optimal timing for your specific situation.
2. Setting Your Compensation Strategically
Once your entity structure makes sense, the next question is: What should you actually pay yourself?
This isn't just about taking home a paycheck. Your salary creates a ripple effect across your entire financial life. Here's what we're balancing:
IRS Reasonable Compensation. S-corp owners must pay themselves a salary that reflects market value for their role. Set it too low, and the IRS can reclassify income and impose penalties.
Social Security Benefits. Your retirement benefit is based on your 35 highest earning years. Underpaying yourself now can shrink both your and your spouse’s future benefits. We help find the balance between tax efficiency and long-term value.
Retirement Contributions. W-2 wages determine how much you can contribute through employee deferrals, matches, and profit sharing. A salary that’s too low limits your ability to save in tax-advantaged accounts.
You don’t have to figure out each piece of the puzzle alone. We help you find that balance of saving on payroll taxes without sacrificing your ability to build long-term wealth.
3. Planning for Variable Income
Let's be honest: business income is unpredictable. One quarter you're crushing it. The next, you're wondering where all the clients went.
That uncertainty keeps a lot of business owners up at night. The key is building a plan that works whether you're having your best year ever or navigating a rough patch.
Quarterly Planning and Cash Flow Management
It’s important that we meet with you throughout the year to review profits, adjust estimated payments, and decide whether to slow salary or pause distributions to preserve cash.
We recently worked with a business owner who'd had several strong years in a row, then hit a wall. Revenue dropped sharply. She'd already laid off employees and was starting to panic about making payroll.
Because we'd been meeting quarterly all along, we could move fast. We cut her estimated tax payments, temporarily reduced her salary to preserve cash, and made sure her lines of credit were ready if she needed them. Those adjustments kept her business stable while she worked through the downturn.
That's the value of proactive planning. When things go sideways, you already have a strategy in place.
Flexible Retirement Contributions
If income fluctuates, you can wait until tax filing (including extensions) to make prior-year retirement contributions. Sometimes, even borrowing to fund them makes sense when the tax savings outweigh the cost. Flexibility like this can help turn unpredictable income into opportunity.
Bonus Tip: Strong years are the time to prepare for lean ones. We want you to keep healthy reserves inside the business, maintain credit access, and avoid over-distributing profits to protect the enterprise you’ve built.
4. Connecting Your Business and Personal Finances
For most business owners, the enterprise itself represents the majority of their net worth. The goal is to transfer income from your business onto your personal balance sheet in the most tax-efficient way possible while simultaneously growing the enterprise value of the business.
There are three primary ways to accomplish this:
Tax-advantaged retirement contributions that can potentially reduce your current tax burden while building future wealth
Growing enterprise value so your business becomes something that can be sold, not just wound down
Strategic distributions that fund your lifestyle and other investments without creating unnecessary tax drag
Many make the costly mistake of not paying themselves enough. If your business isn’t one you can eventually sell and you’ve underpaid yourself for years, you may reach retirement without the Social Security credits or savings you expected.
We review both business finances and personal spending together. Often, the best advice we give is simple: Start paying yourself what you’re worth.
Pre-Retirement Considerations
As you get closer to retirement, these conversations become even more important. You'll want to think about:
The business owner’s transition into retirement typically happens gradually, moving to a part-time role or staying on as a consultant during the ownership transition. This phased approach often works better emotionally and practically.
5. Building a Cohesive Team
One of the most valuable investments you can make is assembling the right team of professionals who collaborate on your behalf.
We believe that every business owner needs three core team members working together:
· A tax professional who understands the nuances of business entity structures, timing strategies, and year-round planning
· A business attorney who handles legal structures, contracts, and succession planning
· A financial advisor who can connect business decisions to personal wealth building and long-term goals while coordinating between your tax professional and attorney
When these three perspectives come together, you get comprehensive planning that addresses the full scope of your financial life as a business owner. Without this collaboration, you risk missing opportunities or making decisions in one area that create problems in another.
Building Your Business Tax Strategy, Together
A smart business tax strategy isn’t just about saving money this year. It’s about turning the success you’ve built into lasting personal wealth. When your compensation, retirement contributions, and distributions all work together, you can create a system that supports your life and your business.
If you're an Affinity client and any of these topics have sparked questions about your current structure, we're here to help you think through the specifics of your situation. Reach out to us anytime to explore whether adjustments might make sense for where your business is today.
If you're not yet a client and you're ready to take a more strategic approach to year-end planning and beyond, we invite you to learn more about how Affinity Wealth can help you align your financial decisions with what truly matters to you. Click here to learn about the Connect Meeting.
Key Takeaways:
How does my business structure affect retirement contributions? Your entity type (LLC vs. S-corp) determines whether retirement contributions are based on total income or just W-2 wages.
Am I paying myself the right amount? Your salary needs to satisfy the IRS, build your future Social Security benefits, and allow maximum retirement contributions without creating an unnecessary tax burden.
What should business owners consider before retirement? Adjust spending expectations, coordinate distributions for tax efficiency, and revisit how personal and business expenses shift once you step back.