Hidden Tax Savings when Raising Employee Compensation

Options for Shareholder-Employees and Domestic Production

John Ledbetter, PhD, CPA, Jason Stanfield, PhD, CPA, and Elizabeth Paulus, CPA

When raise and bonus discussions arise, managers often fail to fully consider the tax implications of such decisions. While an increase in the company's compensation and payroll tax expense is guaranteed, so too is a corresponding tax deduction, effectively lowering the total cost of the additional compensation by the company's marginal tax rate. This article explores two additional possibilities that, for some employers, could further reduce the effective cost of compensating employees through additional tax savings. These options do not provide net tax savings to employers, but rather use large tax savings to offset the cost of increasing employee compensation, a critical factor in recruiting and retaining top talent at all levels.