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The Insulator • August 2026
10
continued from pg.9
is a limit on the medical 
expenses you can deduct. 
With the right provisions in 
a C corporation, you can 
deduct all medical insurance 
premiums and all out-of-
pocket medical expenses for 
co-pays, medications, first 
aid items, etc.
Strategy #4 - Defer Income
One way the IRS allows 
you to defer income is by 
contributing to a retirement 
plan. A retirement plan that 
works well for a business 
with no employees (you may 
have another business with 
employees) is a Simplified 
Employee Pension Individual 
Retirement Account (SEP 
IRA). The IRS allows you 
to contribute 18.58% of net 
profit (maximum of $50,000 
per year) to your SEP IRA 
for retirement. If you have 
$100,000 net profit in your 
business, you would be 
able to contribute up to 
18.587%, or $18,587, to 
your retirement account. 
You would get to deduct 
the contribution, saving you 
thousands in federal and 
state taxes. Thus, money 
goes into your SEP IRA 
tax-free and grows tax-free. 
SEP IRA funds are taxed at 
ordinary income tax rates 
when qualified withdrawals 
are taken after 59.5 years of 
age. 
Strategy #5 - Proper Use of 
Entities
The tax rules are different 
for S corporations, C 
corporations and Sole 
Proprietorships. You want 
to use the entity or entities 
which require you to pay 
the least amount of tax. 
For example, if you operate 
your business as a sole 
proprietor, all profit (up to 
the taxable maximum) is 
subject to Social Security 
and Medicare taxes. In an 
S corporation, profits are 
distributed through a K-1 
and are not subject to Social 
Security and Medicare 
taxes. Having your profits 
flow to you as K-1 income, 
instead of as profit from a 
sole proprietorship, could 
save you thousands each 
year in Social Security and 
Medicare taxes. 
For example, if a sole 
proprietorship has a profit 
of $100,000, a 15.3% tax 
(12.4% Social Security 
tax and 2.9% Medicare 
tax) would have to be paid 
on the entire $100,000, 
totaling $15,300 ($100,000 
x 15.3%). In comparison, 
if an S corporation has a 
profit of $100,000 and you 
pay yourself a reasonable 
salary of $40,000, the other 
$60,000 would flow to you 
as profit (K-1) and is not 
subject to Social Security 
and Medicare taxes. You 
only pay social security 
and Medicare tax on the 
$40,000 salary, for a tax of 
$6,120 ($40,000 x 15.3%). 
In this scenario, using 
an S corporation would 
save $9,180 ($15,300 - 
$6,120) in taxes each year. 
While it would be nice to 
have the whole $100,000 
excluded from Social 
Security and Medicare 
tax, the IRS requires that 
owner-employees of an 
S corporation be paid a 
salary that is a “reasonable 
amount” for the work being 
performed. 
Conclusion
As a result of people not 
using all the deductions 
and laws available, billions 
of dollars are overpaid in 
taxes. According to the IRS 
commissioner, millions of 
taxpayers are overpaying 
their taxes each year. Begin 
using these five strategies to 
avoid paying more than you 
are required in taxes. 

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