SUMMARY: Shareholder-employees of corporations can use their paychecks as an important financial planning tool to save taxes, save for retirement, manage estimated tax payments, and right size the P&L.

If you run a closely-held corporation, your paycheck can be an important financial planning tool. The techniques below assume that you earn a salary from the corporation and control both individual compensation levels and corporate earnings.

In a C corporation you can leverage the differential between the individual and corporate income tax brackets to minimize total income tax expense. Usually this boils down to taking a reasonable salary throughout the year, then deciding whether to take a bonus in December of this year or January of next year, depending on which is more tax efficient.

In an S corporation, profits pass through to the owners’ individual tax returns, so playing the brackets as described above won’t save you income taxes. S corp. owners can, however, take shareholder distributions, which are not subject to payroll taxes. Such distributions are in addition to your regular paycheck, so leave room for them in your total compensation package. Note that taking too much in shareholder distributions relative to W-2 wages raises an IRS audit flag.

If your company offers a SIMPLE IRA or 401K plan, save for retirement by having withheld from your paycheck the maximum amount you can as an employee. If you can’t afford the maximum, then set a target and stick to it. An easy way to hit your target is to divide it by the number of pay periods in the year and have that amount withheld each paycheck for an automatic savings plan.

Remember that the higher your salary, the greater the share of your company’s employer contribution that will end up in your retirement account. Subject to certain limits, this holds true for both the company match and any discretionary profit sharing component contained in certain 401K plans.

Personal estimated tax payments can cause problems for entrepreneurs because they’re easy to forget, late or missed payments garner penalties and interest, and the lump sum quarterly payments take a big bite out of cash flow all at once.

You can avoid these problems by having extra income taxes withheld from your paychecks. Divide the amount you must pay in estimated taxes by the number of payroll periods in the year and add that amount to the standard tax table withholding. The downside of this method is that you might be paying the IRS a little earlier than you would through quarterly estimated tax payments. But unless the numbers are large and your short-term investment alternatives are very good, it’s usually worth the convenience.

Finally, you can use your paycheck to right size your company’s P&L. On one hand, building a long-term sustainable company requires working capital, so don’t take more than your company can afford. On the other hand, don’t habitually underpay yourself, either, because that same sustainable company must get used to paying for top notch management talent, including you. Over time you’ll get a feel for what compensation level is “just right”. If you plan to sell the company in the next few years, don’t worry too much about how the size of your W-2 will affect an equity event; savvy investors know how to normalize financial statements for owner’s compensation.

Applying these techniques to your business may require research and the advice of your CPA, including a mid-year check-in to ensure your annual strategy is still sound. The investment is well worth it, however, as you’ll realize the additional benefits of no unpleasant “surprises” and a measure of peace of mind.