Small Business and Business Software

Small Business Tax Credit For 401k Startup Costs

Small Business Tax Credit For 401k Startup Costs – One of the most important aspects of running a small business effectively is establishing a retirement plan that is appropriate for your organization. Evaluating the right retirement plan is an area in which we often advise our clients who are small business owners. As many of our clients have grown their businesses, we’ve helped them replace their existing company retirement plans with 401(k) plans. In general, 401(k) plans provide more choice and flexibility than other types of retirement plans. Here, we’ll explore some of the key characteristics of 401(k) plans and the potential benefits they can provide both personally and in various aspects of running your business.

Business owners often face challenges in attracting and hiring top talent. Sure, they want to staff their firms with highly qualified candidates, but more experienced or specialized professionals are more likely to accept positions in larger firms with more generous benefits packages. A 401(k) plan can provide a recruiting advantage, as many job seekers find 401(k)s more robust than other types of retirement plans, and frankly, 401(k)s are more well-known and recognized. Additionally, 401(k) plans can help you retain key talent through certain plan features, such as the phase-out of company contributions.

Small Business Tax Credit For 401k Startup Costs

Small Business Tax Credit For 401k Startup Costs

Another benefit of 401(k) plans is that they can provide a better opportunity to save for your own retirement as a business owner, sometimes more than other types of retirement plans like SEPs or SIMPLE IRAs. It’s important to note that a 401(k) is a type of defined contribution plan. In 2022, the IRS has set the maximum contribution for defined contribution plans at $61,000 and $67,500 for people age 50 and older. To maximize contributions up to annual defined contribution limits, it’s often important for a 401(k) plan to include a profit-sharing component. As a business owner, you contribute to your employee and employer 401(k) account through a combination of 401(k) salary deferrals, company matching contributions, and company profit-sharing contributions, such as those described below:

Publication 560 (2021), Retirement Plans For Small Business

401(k) salary deferrals (employee contribution): up to $20,500 in 2022 (additional $6,500 catch-up contribution for participants age 50 and older, total $27,000 in 2022)

401(k) Matching Contributions (Employer Contribution): Company matching contributions can be based on a fixed dollar amount or a specific matching formula, but the most common type of company contribution is a ported contribution. Generally, a safe harbor contribution can be a matching contribution of up to 4% of salary based on each employee’s salary deferrals or a non-elective contribution of 3% of employee salary, regardless of whether the employee contributes to the plan themselves. Under the safe harbor rules, the company’s contribution is fixed at 100% immediately.

Profit Sharing Contributions (Employer Contribution): Refers to additional company contributions based on formulas that give employees a share of the company’s profits. Profit-sharing contributions can be discretionary, meaning a business can choose whether to make contributions from year to year. However, certain criteria must be met so that profit-sharing offers do not discriminate in favor of highly compensated employees to comply with ERISA rules. Profit-sharing contributions may be subject to a vesting schedule to encourage employee retention.

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Janet, a business owner, has established a Safe Harbor 401(k)/Profit Sharing Plan as her company’s retirement plan for herself and her employees. Janet is 55 years old and receives $175,000 in annual W-2 income from her business. She increases her employee deferrals to $20,500, and she is eligible for a maximum catch-up contribution of $6,500 from those over age 50, bringing her total “employee” contribution to $27,000. Janet set up a 401(k) plan that she decided to safely add up to 4% of salary with matching contributions using a basic matching formula. Therefore, Janet can make a matching contribution of $7,000 (4% of $175,000) of her business assets. Finally, Janet completes the $33,500 company profit-sharing contribution to her account, reducing the company’s profit-sharing contributions to her employees and still keeping the 401(k) plan in compliance from a nondiscrimination perspective. Therefore, Janet can increase her 2022 profit-sharing/401(k) contribution up to the IRS limit of $67,500. $27,000 + $7,000 + $33,500 = $67,500.

K Plans For Small Business Owners

In addition to serving as a tool to promote the acquisition and retention of key talent and a great vehicle for retirement savings, a 401(k) plan provides a variety of tax benefits to business owners.

If a business owner takes pre-tax salary deferrals and is over age 50, they can reduce their taxable income by up to $27,000 in 2022. The account, subject to certain limitations, is also tax-deductible to employers.

There are several 401(k) related tax credits available to small business owners. Small businesses with 100 or fewer employees may qualify for a tax credit each for the first 3 years when they first start a new 401(k) plan. Another tax credit is available for plans that provide automatic enrollment for new employees, which encourages small business owners to include automatic enrollment as a feature of their plan. Finally, the company can deduct the project management/administrative expenses paid as a business expense. Keep in mind that you cannot deduct start-up expenses and claim the credit listed above on the same expenses.

Small Business Tax Credit For 401k Startup Costs

As always, Modera is here to help you assess your specific needs and possible options when choosing the right retirement plan for your business. Contact your estate manager if you have any questions.

Choosing The Right 401(k) For Your Employees & Your Business

Modera Wealth Management, LLC (“Modera”) is an SEC registered investment advisor. Registration with the SEC does not imply any level of skill or training. Modera may conduct business only in states where a notice has been filed or where it qualifies for an exemption or exclusion from the notice filing requirements. For information about Modera’s registration status, fees and services, please contact Modera or refer to the investment adviser’s public disclosure website ( for a copy of our disclosure prospectus, which appears as Part 2A of Form ADV. Please read the prospectus carefully before investing or sending money.

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This article is limited to conveying general information about Modera’s financial planning and investment advisory services which may not be suitable for everyone. Nothing in this document should be construed as investment advice or legal, tax or accounting advice or as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting matters, we recommend that you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed in this document are true, and the information contained in this document should not be considered a solicitation to participate in any particular investment or financial planning strategy. Statements and opinions expressed in this article are subject to change without notice based on changes in law and other conditions.

Investing in the markets involves gains and losses and may not be suitable for all investors. The information contained in this document is subject to change without notice and should not be construed as a solicitation to buy or sell any security or to participate in any particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on different levels of diversification and other factors. Diversification neither guarantees profit nor guarantees against loss. And now, thanks to the SECURE Act of 2019, an important new benefit is available to small businesses: a tax credit of up to $16,500, guaranteed by offering employees a qualified retirement plan. These include programs like a 401(k), SIMPLE IRA, or SEP, all of which can be easier to offer than you might think.

In this article, we’ll review how SECURE Act tax credits work, discuss how you can claim them, and answer common questions you may have.

The Big List Of U.s. Small Business Tax Credits

Since 2001, businesses with 100 or fewer employees have had access to a retirement tax benefit: If you start offering a retirement plan to your employees, you can claim a tax credit equal to 50% of the total cost of establishing and communicating that plan, up to $500 per year. The credit is a big boost for employers interested in hiring and retaining top talent, opening the door for small businesses around the world to help their employees save for retirement.

However, in 2020, this credit was significantly improved with the establishment of each Community for Retirement Reform (SAFE) Act. Among many other changes, it increased the tax credit that qualified employers can use to benefit up to $5,000 over three years for “ordinary and necessary expenses” of starting a qualified retirement plan and provides an additional credit. Some automatic contribution plans.

For taxable years beginning before January 1, 2020, the credit is equal to 50%

Small Business Tax Credit For 401k Startup Costs

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