The Challenge: Dual Incomes, Inefficient Structure
Elizabeth was overpaying payroll taxes by taking an excessive W-2 salary from her C-Corporation. Meanwhile, Adam was heavily involved in managing the financial operations of her business without being compensated or receiving tax advantages for his time. Together, their structure lacked efficiency, left retirement contributions underutilized, and blurred the line between personal and business finances—an obstacle to long-term growth or a potential business sale.
Gelt’s Strategic Approach: Restructuring for Efficiency and Growth
Adjusting Elizabeth’s Salary
- Recommended reducing Elizabeth’s W-2 income to around $80,000, aligning with reasonable compensation standards for her role.
- Result: Lower Social Security and Medicare obligations, ensuring she no longer overpaid payroll taxes.
Establishing Adam’s Management Company
- Advised Adam to create an LLC taxed as an S-Corporation, which would receive $170,000 in management fees from Elizabeth’s C-Corporation to reflect his role and time.
- Benefits included:
- Maximized Retirement Contributions through a Solo 401(k).
- California PTET Election allowed deduction of state taxes at the entity level, bypassing the $10,000 SALT cap and lowering federal taxable income.
Cleaning Up Financials for Future Growth
- Shifted mixed personal and business expenses out of Elizabeth’s C-Corporation into Adam’s new management company.
- Result: Clearer financial records, stronger compliance, and improved attractiveness to potential acquirers.
- With the business also eligible for Qualified Small Business Stock (QSBS) treatment, this cleanup positioned them to maximize long-term exit value.
Results & Implementation
With Gelt’s guidance, Adam and Elizabeth achieved:
- Lower payroll taxes for Elizabeth by reducing her salary to a reasonable level.
- Enhanced tax advantages for Adam through the PTET election and Solo 401(k).
- Cleaner financial statements that support growth, M&A readiness, and QSBS eligibility.
Conclusion: Laying the Foundation for Wealth and Growth
By restructuring compensation and streamlining financial operations, Adam and Elizabeth unlocked meaningful tax savings while preparing for future success. Their optimized structure lowered their annual tax burden, created retirement benefits, and improved the financial readiness of the business for acquisition opportunities under QSBS.
Before Gelt, we thought we were doing the right things with our salaries and business setup. They showed us a smarter way to structure everything, saving us about $20,000 a year while also setting up Elizabeth’s company to fully benefit from QSBS in the future.
— Adam and Elizabeth, San Jose, CA
Disclaimer: This case study is based on a real client engagement. Certain names, locations, and identifying details have been changed to protect client confidentiality. The challenges, strategies, and outcomes described reflect actual facts. Show more
This material is provided for informational and educational purposes only. It does not constitute, and should not be relied upon as, tax, legal, or accounting advice. Each individual’s circumstances are unique, and readers should consult their own qualified professional advisors before making any decisions.To comply with U.S. Treasury Department regulations (Circular 230), we inform you that any tax information contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.This material is provided for informational and educational purposes only. It does not constitute, and should not be relied upon as, tax, legal, or accounting advice. Each individual’s circumstances are unique, and readers should consult their own qualified professional advisors before making any decisions.To comply with U.S. Treasury Department regulations (Circular 230), we inform you that any tax information contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
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