The shareholders file individual tax returns and pay income tax on whatever share of profits they receive from the business.
S corporation owners have control over whether they receive their business income as wages or as dividend distributions. Wages from an S corporation are subject to FICA taxes, but dividend distributions are not.
FICA taxes include a 12.4 percent Social Security tax up to the Social Security wage base (which will be $127,200 in 2017), plus another 2.9 percent of Medicare taxes (for an unlimited amount of income). In addition, there’s another 0.9 percent Medicare surtax on earned income above $200,000 for individuals (or $250,000 for married couples).
In total, this leads to FICA tax rates of 15.3 percent initially, dropping to 2.9 percent beyond the Social Security wage base and rising to 3.8 percent at higher levels of earned income.
If you have an S corporation, you cannot treat your income 100 percent as dividends in an effort to completely avoid FICA taxes because the IRS requires S corporation owner-employees be paid “reasonable compensation” for the services they render to the business.
Nonetheless, the reality is that for highly profitable businesses, a portion of profits, over and above reasonable salary compensation, can be distributed as a dividend to the S corporation owners, saving FICA self-employment taxes in the process. For profitable businesses, the tax savings can be very substantial.
Solo 401(k)
A solo 401(k) is an ideal retirement plan for a ranch family that doesn’t have employees because it offers high contribution limits without the fees or filing requirements associated with traditional group 401(k) plans.
In 2016, a business owner can defer up to $18,000 of salary ($24,000 if age 50 and over) into a 401(k) plus approximately 25 percent of business profits, up to a combined annual maximum of $53,000 for those under age 50 and $59,000 for people age 50 and over.
Although it is called a “solo” 401k, it can actually be set up for a husband and wife. If you have a bona fide partnership, it would work for them as well. Part-time employees who work fewer than 1,000 hours per year may be excluded from the plan.
Another advantage of a solo 401(k) is the ability to make contributions to a Roth account. While contributions to a Roth account don’t reduce your taxable income, the distributions you take during retirement from a Roth account are tax-free.
A solo 401(k) plan has to be established by the end of the business tax year in order to make a contribution for that year. If you were hoping to make contributions for 2016, you may want to consider a simplified employee pension. A simplified employee pension is a variation of an IRA that offers higher contribution limits than a regular IRA. Contributions to a simplified employee pension can be made up to the due date (including extensions) for filing your federal income tax return for the year.
If you obtain an extension for filing your tax return, you have until the end of that extension period to deposit the contribution, regardless of when you actually file the return.
There are many factors that go into determining the right type of entity and retirement plan for your business as well as the investments to use for your retirement plan. Make sure you consult with a professional tax adviser and investment adviser when making these decisions. 
Chris Nolt is the author of Financial Strategies for Selling a Farm or Ranch and owner of Solid Rock Realty Advisors and Solid Rock Wealth Management. For more information, visit Solid Rock Realty Advisors and Solid Rock Wealth Management or call (800) 517-1031.
