[The Reversal Phenomenon] Does increasing director compensation actually cost you money? The truth about the 'net income reversal phenomenon' that you need to know
Hello, I am Shinichi Muramatsu, a tax accountant.
Recently, I have been receiving a great many consultations from business owners.
“At the end of the day, what is the most cost-effective amount to set for director compensation?”
With rising prices and social insurance premiums, it is only natural as a business owner to want to keep as much of the money you worked hard to earn as possible.
When we perform detailed calculations, including the impact of tax reforms, we are seeing surprising results that are currently sending shockwaves through the business community.
It turns out that there are multiple 'reversal phenomenon' thresholds where your net income actually decreases even though your annual salary has increased.
1. The 6.66 million yen trap: The danger zone where increasing your salary costs you money
Here are the specific 'net income reduction lines' that require particular caution.
・Danger lines (where net income drops sharply): 6.66 million yen / 25.47 million yen / 25.98 million yen / 26.46 million yen / 26.97 million yen
・Caution lines (net income peak or just before it): 6.63 million yen / 25.44 million yen / 25.95 million yen / 26.43 million yen / 26.94 million yen
For example, in the case of an annual salary of 6.66 million yen, even though the gross annual salary is higher than 6.63 million yen, when you look at the actual results, the money you keep (net income) actually decreases.
You worked hard to grow your company and increase your compensation, so it is a terrible shame to end up with less money in your pocket.
2. Why does this reversal phenomenon occur?
Why does such a strange phenomenon occur? The root of the problem lies in the fact that the following four factors overlap at just the right timing.
・Changes in the basic deduction ・Increased burden of social insurance premiums ・Progressive income tax ・Burden of residence tax
As a result of these combining like a puzzle, a difference of only a few tens of thousands of yen in gross salary can cause your net income to reverse.
In other words, from now on, simply increasing director compensation because 'it's a nice round number' carries the risk of being extremely inefficient.
3. 'How you receive it' is more important than 'how you earn it'
So, what should business owners do? The point is 'not to try to optimize using only director compensation (gross salary).'
At our firm, in order to help business owners keep more money, we perform simulations tailored to each individual client using a multi-faceted approach like the following.
・Cleverly utilizing the cap on social insurance premiums (the upper limit of standard monthly remuneration)
・Exit strategies using pre-determined notification salaries and retirement allowances
・Creating tax-free structures by utilizing company housing systems and business travel allowances
・Asset formation through the Small Enterprise Mutual Relief system
・Combining income distribution to family members, hometown tax donations (Furusato Nozei), and mortgage deductions
In the coming era, what is important for business owners is
not 'how to earn (sales)', but 'how to receive (the structure)'.
I will support your desire to 'improve the company further and keep funds on hand to invest in the future'
with thorough numerical simulations (evidence).
4. If you eliminate 'vague' decisions, your company will become much stronger
I believe that cases where you lose money simply because you don't know
will continue to increase in the future.
For those who decide executive compensation vaguely,
I highly recommend performing a rigorous simulation at least once.
Once it becomes clear 'how much will ultimately remain in your hands',
your future investment plans and daily management will become surprisingly clear.
'I want to know the optimal executive compensation line for my company'
'I want to consult about all available measures'
Please feel free to share those thoughts with me.
So that you can stand on the stage of your core business with peace of mind,
I will provide my full support as a great supporting actor
who prepares the best 'stage equipment'.
Inquiries
'I want you to check if my current executive compensation is truly optimal'
'I want to create a structure that maximizes net income' - if this is you,
please visit our website.
We will calculate the optimal return tailored to your company.
Shinichi Muramatsu Certified Public Tax Accountant Office Website https://muramatsu-office.com