Maximizing Wealth: The Power of Deferred Compensation in a Growing Business

Ted, Lisa, and Larry are co-owners of a successful, third-generation media company. This business provides sales and marketing services to the medical device industry. What began over 60 years ago as a small brochure and catalog company has grown into a remarkable niche conglomerate with a compelling growth story.

The Company’s Evolution

Ted and Lisa are siblings. They each own 40% of the company stock. Their cousin Larry, who does not participate in day-to-day operations, holds the remaining 20% and serves on the board.

Since Ted became President and CEO eight years ago, the company has increased its revenue from $30 million to $45 million. Margins have also improved modestly. What started as a rapid growth phase has transitioned into a steady, cash-generating machine. The business now boasts a diverse customer base and a strong leadership team. Each owner draws over $1 million annually in salary as a result of this success.

However, that’s a great situation until tax season arrives.

The Tax Burden

During tax season, they face a significant challenge: nearly half of their income goes to federal and state taxes. Despite the strong performance of their business, much of their hard-earned money vanishes before they can reinvest it or pursue long-term goals.

Ted and Lisa find themselves penalized for their peak earnings. Since they were taking most of the company’s profits as W-2 income, they were paying the highest personal tax rates. In contrast, the C corporation only faced a 21% tax rate. They began asking: Is there a smarter way to keep more of what we earn — and build long-term wealth — without handing over so much to taxes today?

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The Problem: High Earnings, Even Higher Taxes

Ted and Lisa realized they needed a new strategy. They had to find a way to lower their tax burden. This approach needed to align with their desire to grow their wealth while limiting their tax exposure.

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The Strategy: Defer Now, Save Later

Ted and Lisa worked with their advisory team to implement a non-qualified deferred compensation plan (NQDC).

Here’s how this strategy worked: Instead of taking their full salary upfront, Ted and Lisa decided to defer a portion of their compensation—about $400,000 per year. They planned for the company to retain these funds for future use. This could mean income during retirement, liquidity during business transitions, or even funding a sabbatical later.

Larry, whose financial situation differed, chose not to participate. That was perfectly fine. NQDC plans are flexible and don’t require every shareholder to join.

So, why did Ted and Lisa choose this route?

The deferred dollars provided multiple benefits:

• They weren’t taxed immediately at the highest personal income rates.

• They remained within the company, growing in a more tax-efficient setting.

• The funds could be distributed in the future, when their income (and tax rate) would likely be lower.

• This choice fit well with their overall financial plan, as they already had significant assets outside the business to support their lifestyle.

  
  

In short, they pressed pause on taxes during their highest earning years, allowing that money to work harder for them instead.

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The Payoff: More Wealth, Less Tax Burn

Over time, Ted and Lisa significantly reduced their annual tax liability without sacrificing long-term access to their wealth. Instead of losing 40 cents of every dollar to taxes, they kept more of their earnings inside the company. This approach allowed for consistent annual growth.

They built a system that helps them:

• Fund future retirement income.

• Prepare for an eventual ownership transition.

• Maintain company strength and liquidity without altering its structure.

  
  

Best of all, they achieved these goals without disrupting day-to-day operations.

What Could This Look Like in Your Business?

If you find yourself earning more than you need to spend, and you’re noticing a large portion going to taxes, consider whether this approach might suit you. Non-qualified deferred compensation is a powerful tool for private business owners who want to align their income, taxes, and long-term wealth objectives.

If you’d like to explore how this strategy could fit into your planning or for your clients, I’d be happy to start the conversation.

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