Deferring Taxes and Building Wealth with a Non-Qualified Deferred Compensation Plan— How One Family Business Used a Smart Strategy to Keep More of What They Earn

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

Ted and Lisa, siblings, run the business and each own 40% of the stock. Their cousin Larry, who is not active in day-to-day operations, holds the remaining 20% and serves on the board.

Since Ted stepped in as President and CEO eight years ago, the company has grown top-line revenue from $30 million to $45 million and improved margins modestly. What began as a growth sprint has matured into a stable, cash-generating machine with a diverse customer base and a strong leadership team. As a result, each of the three owners was comfortable drawing over $1 million annually in salary.

That’s a great place to be — until tax season rolls around.

They were losing nearly half of their income to federal and state taxes. Despite the business’s strong performance, much of their hard-earned money was gone before they could invest it or put it toward long-term goals.

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The Problem: High Earnings, Even Higher Taxes

Ted and Lisa were in their peak earning years — and getting penalized for it. Because they were pulling most of the company’s profits as W-2 income, they were paying the highest personal tax rates available. Meanwhile, the C-corporation itself was only taxed at 21%.

They began to ask: 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 Strategy: Defer Now, Save Later

Working with their advisory team, they implemented a non-qualified deferred compensation plan (NQDC).

Here’s how it worked: instead of taking all their salary upfront, Ted and Lisa chose to defer a portion of their compensation — about $400,000 per year — and let the company hold those funds for future use. That could mean income in retirement, liquidity during a business transition, or even funding a sabbatical down the road.

Larry, whose financial circumstances were different, opted not to participate. And that’s perfectly fine — NQDC plans are flexible and don’t require every shareholder to join in.

So why did Ted and Lisa choose this path?

Because the deferred dollars:

• Weren’t taxed right away at the highest personal income rate

• Remained inside the company, growing in a more tax-efficient environment

• Could be distributed in the future, when their income (and tax rate) would likely be lower

• Fit well with their overall financial plan, since they already had substantial assets outside the business to support their lifestyle

In short, they were pressing pause on taxes during their most expensive years — and letting that money work harder for them in the meantime.

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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 watching 40 cents of every dollar disappear to taxes, they kept more of their earnings inside the company, allowing it to grow year after year.

They also created a built-in system to:

• Fund future retirement income

• Prepare for an eventual ownership transition

• Keep the company strong and liquid without changing its structure

  
  

And they did it all without disrupting day-to-day operations.

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What Could This Look Like in Your Business?

If you're earning more than you need to spend — and watching a large portion of it go to taxes — there may be a better way. Non-qualified deferred compensation can be a powerful tool for private business owners looking to align income, taxes, and long-term wealth goals.

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