Management Consultant Saves $36K/Year with S-Corp + Solo 401(k) + Augusta Rule

The Problem

This client was a solo management consultant specializing in healthcare operations, earning $420,000 in net Schedule C income. The full amount was subject to self-employment tax ($32,200 annually) and the client had no retirement plan, no accountable plan, and no strategy for reducing the overall tax burden. The client worked from a dedicated home office (320 sq ft) and owned a home valued at $680,000 in northern Virginia.

The client was paying an effective combined federal and Virginia state tax rate of approximately 40% on income above $200,000, with no planning strategies in place. The prior CPA filed accurate returns but never discussed entity restructuring, retirement plans, the Augusta Rule, or any other planning opportunities. The client discovered AE Tax Advisors through a colleague who had saved over $40,000 per year with similar strategies.

AE Tax Strategy

1. S-Corp Election and Reasonable Compensation Under IRC §1362

We filed Form 2553 for S-Corp election and established reasonable officer compensation at $130,000 based on BLS data for healthcare management consultants at the senior/principal level in the Washington D.C. metro area. This removed $290,000 from the self-employment tax base, saving $19,400 in FICA taxes annually (15.3% on the Social Security wage base differential plus 2.9% Medicare on the full differential).

2. Solo 401(k) + Accountable Plan Under IRC §401(a) and §62(a)(2)(A)

We established a Solo 401(k) with $23,500 employee deferral and $32,500 employer contribution (25% of $130,000 W-2), sheltering $56,000 from current taxation. At the combined 32% federal plus 5.75% Virginia marginal rate, this produced $11,700 in net incremental tax savings. We implemented an accountable plan for home office ($7,400/year), vehicle ($4,200/year), technology ($2,800/year), and professional development ($2,600/year), producing $1,900 in additional annual savings.

3. Augusta Rule Under IRC §280A(g)

The client's S-Corporation rented the client's personal residence for 12 days of documented business strategy sessions, client meetings, and team retreats at $420 per day (fair market rent supported by comparable rental data for executive retreat homes in northern Virginia). The $5,040 in rental payments were deductible to the S-Corp under IRC §162 and excluded from the client's personal income under IRC §280A(g) (the 14-day tax-free rental exclusion). At the 37.75% combined rate, this produced $1,900 in tax savings. Combined with the rental income exclusion benefit, total Augusta Rule savings reached $3,000.

Before & After Comparison

Tax Category	Before	After	Savings
Self-Employment / FICA Tax	$32,200	$12,800	$19,400
Retirement Plan Tax Savings	$0	$11,700	$11,700
Accountable Plan Savings	$0	$1,900	$1,900
Augusta Rule Savings	$0	$3,000	$3,000
Total	$32,200	$0	$36,000

Key Takeaways

• Solo consultants earning above $150,000 should implement S-Corp election as a baseline strategy — the FICA savings alone typically exceed $15,000 per year.
• The Augusta Rule allows up to 14 days of tax-free rental income per dwelling unit — the S-Corp deducts the rent while the owner excludes the income.
• Solo 401(k) plans offer higher contribution limits than SEP-IRAs for owner-operators because they include both the employee deferral ($23,500) and the employer contribution (25% of W-2).
• Stacking multiple strategies (S-Corp + retirement + accountable plan + Augusta Rule) creates compounding tax savings that significantly exceed any single strategy alone.