Retirement Contributions Affect Business Taxes

A 401(k) plan, or retirement contributions, can help you and your employees save for retirement with pre-tax dollars. This gives you time to save money until you need to take it out. When a 401(k) is structured well, it can increase employee morale and retention.

Despite those two benefits, a recent survey shows that more than 70% of small businesses don’t offer 401(k)s to their employees. This could be due to the perception that 401(k)s are expensive. But long-term, they can actually provide valuable tax savings! 

Here are the four key areas where retirement contributions can help you save on your business taxes. 

1. Tax Credits. The IRS knows that setting up and following through with a 401(k) plan can be expensive for small businesses. But if you have fewer than 100 employees, you might be eligible for a tax credit! You can claim half of the total expense for establishing, administering or educating your employees about your plan, up to $500, for the first three years of the plan’s existence. Because this is considered a credit instead of a reduction, it can help reduce your taxes on a dollar-to-dollar basis.
2. Tax on Employee Contributions. Unfortunately, you can’t get out of paying taxes on the money your employees throw into their 401(k)s. In most cases you don’t have to withhold state of federal income taxes for them, but they will have to pay their Social Security and Medicare tax. In addition, you’re expected to pay the employer’s share of the payroll taxes on the employee contribution.
3. Taxes on Employer Match. If you match your employees’ contributions, that money is tax-free! Since your employees don’t pay income or payroll tax on it, you don’t have to either. You also don’t have to pay federal unemployment tax on it, and workers’ compensation insurance carriers let you exclude it from your wage calculation. And it gets better; you can still claim an expense on your business’s tax return for the money that you put into your employees’ accounts.
4. Benefit to the Owner. If you’re the owner of a business, you might be able to personally benefit from having your company set up a 401(k) plan. As of 2013, the IRA contribution limit was $5,500, or $6,500 if you’re over the age of 50. However, you can put $17,500 into your 401(k), plus an additional $5,500 if you’re age 50 or above. In addition, structuring your company’s 401(k) as a Roth plan can help you take advantage of a Roth (even if your income is above the limit for a Roth IRA). With a Roth, deposits into the retirement account are taxed — but withdrawals are tax-free!

Have additional questions on how retirement contributions can affect your business taxes? Our financial experts are here to help! Our comprehensive tax preparation and planning services include payroll and sales tax prep, tax authority and audit representation, and so much more. This is the all-encompassing tax preparation assistance your business needs to minimize tax liability and ensure financial solvency. Not all tax planning opportunities are readily apparent. By having us on your team, you are more likely to benefit from those opportunities. Contact Taurus CPA Solutions today!