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The Business of Savings
Business tax savings that put a smile on your employees faces!
The rush is not only on for the holiday season, it’s also on for businesses that have a direct need to lower taxes for the current year. While the safe harbor deadline for 2010 has passed, it’s not too late to start a 401(k) that offers a profit sharing 401(k) component (after December 20th it will be too late). A profit sharing plan offers tax benefits, rewards employees, and offers flexibility on how much to award based on the success of your business each year.
Employer contributions to a profit sharing plan are discretionary and can even be $0 in tough years, although contributions are allowed even when the business doesn’t make a profit.
There are a couple other important things to note when considering a profit-sharing 401(k) plan:
- There is no personal deferral contribution by employees for profit sharing; it all comes from the company.
- Profit sharing can be given on a whole dollar amount where everyone gets the same, a salary percentage, or on a social security integrated basis (call us for an explanation if interested in this option. The maximum amount an employee can receive is $49,000 ($54,500 if 50+ years of age).
- There are advanced profit sharing options that allow you to award different amounts by age, tenure, or employee group. These require us to consider different scenarios to determine the best fit for your organization and this deadline has passed for a 2010 plan.
- The plan must be established in the current tax year, but contributions do not need to be made until the final federal return is filed for your business (e.g. setup prior to December 31, 2010 and contribute before April 15, 2011 for calendar tax year).
If you don’t have a 401(k) plan and have an urgent need to shelter money from taxes this year, you can do so with a profit-sharing only 401(k). You can also request to have your plan amended to a more traditional, safe harbor plan, or consider advanced profit sharing options for 2011 and beyond.