There are options for small businesses that wish to help their employees save for retirement. The most appropriate option for your business depends on your current financial circumstances and employee turnover rate.
Businesses in the United States aren’t required by law to offer any sort of pension or retirement plan, but all employers must withhold payroll taxes for Social Security. When an employee retires, they receive benefits from the Social Security Administration based on their entire work salary history.
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You don’t have to withhold taxes on independent contractors you worked with in your business but must report the money you paid them to the IRS. The independent contractor pays the Social Security and other taxes on their individual income tax return.
The three most common retirement plans available for small businesses are the 401(k), SEP IRA and SIMPLE IRA. All three are types of investment accounts that offer tax savings.
The 401(k) generally offers the highest contribution limit and the most flexibility. For 2014, the maximum annual contribution limit was $17,500. As an employer, you can decide upfront whether you want to match any of your employee’s contributions to their 401(k) or if you want to allow employees to take loans against the account and set a vesting schedule. Contributions to a 401(K) are with pre-tax dollars, but if you go with a Roth 401(k), all contributions are taxed upfront.
While there are yearly IRS reporting requirements with a 401(k), the plan may work the best for your business if you have a high rate of employee turnover. With the ability to add the vesting schedule, you can avoid matching contributions during the first year of their employment. You can set up a 401(k) with automatic enrollment if you have at least one employee.
The Simplified Employee Pension, or SEP IRA, are retirement accounts you fund for your employees. The SEP IRAs usually have a contribution limit near the amount of a 401(k). You can’t allow employees to take loans against a SEP IRA and they are immediately 100 percent vested in the account. Unlike the 401(k), there are no special yearly reporting requirements with the IRS.
Under a SIMPLE IRA, also known as the Savings Incentive Match Plan for Employees, the employer is required to contribute to the account but the employee can as well, and you don’t report annually to the IRS. You must match the money your employee contributes to the SIMPLE IRA over the year for up to 3 percent of their annual salary, but the contribution limits for a SIMPLE IRA are lower than that of a SEP IRA or 401(k). For example, in 2014, the maximum contribution amount for the year is $12,000. The SIMPLE IRAs are for employers with less than 101 employees.
Contributions you make to your employee’s retirement plans, no matter what type you go with, are generally tax deductible. While the 401(k), SEP and SIMPLE IRAs are the most common options for small businesses, you can create a profit sharing plan instead. Profit sharing plans are completely discretionary and operate by the terms set by the employer, so you can choose to contribute at will as long as it’s defined in your plan terms. Financial institutions, such as banks, often offer basic profit sharing plan models for businesses to follow.
Need to Know
No matter which plan type you decide to go with, make sure you understand all the rules and any sort of IRS requirements that come along with it. Speak to a financial institution for more information about the plans available for your small business.
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