Tax Lawyer Blog

A Blog written by the Tax Attorneys for Individuals and Businesses

RETIREMENT PLANS FOR SMALL BUSINESS OWNERS AND SOLO PRACTITIONERS

Small business owners are always looking for a way to save money; especially in this economy.  Many small business owners are not aware of the tax incentives that certain retirement plans offer.  This post will outline some of the cost-saving ways that can make a real difference to your bottom line that can also provide added security for you and your employees upon retirement.

Simplified Employee Pension (SEP)

A SEP is an employer-established IRA plan that can be established by a one person business or by a business owner with multiple employees.  A small business owner who establishes a SEP may contribute up to 25% of his or her compensation but not more than $49,000 (for tax year 2011).  The maximum amount of compensation that can be considered under an SEP plan for 2011 is $245,000. 

An SEP is attractive because it is straightforward.  For instance, there are no reporting requirements for a SEP.  The small business owner simply sets up the account, makes contributions and claims a 100% deduction on his or her tax return.  Another advantage of a SEP is that it can be created after the end of the tax year.  So long as the plan is established and contributions are made by the due date of the income tax return for the year (including extensions), the requirements for the SEP plan have been met.  This can be a significant benefit to a small business owner with cash flow problems. 

Savings Incentive Match Plan for Employees (SIMPLE) IRA

A SIMPLE IRA is a good plan for a business with a net annual income of $15,000 or less.  The employer must have not more than100 employees who earned $5,000 or more in the proceeding calendar year to qualify for a SIMPLE IRA.  Contributions to a SIMPLE IRA plan include an employee’s salary reduction contribution as well as an employer’s matching contribution which is generally up to 3% of the employee’s reduction contribution.  A small business owner who takes an annual salary can benefit immensely by making both types of contributions to his or her own account. 

For 2011, the maximum contribution limit that can be made to a simple plan is $11,500.  Note that employees that are 50 years or older may contribute an additional $2,500 annually. 

Unlike a SEP plan, a SIMPLE IRA must be established before September 30th for the tax year that the small business owner wishes to make a contribution.  Salary reduction contributions for each employer must be made within 30 days after the end of the month in which the amounts would have been paid to the employees.  However, matching contributions and non-elective contributions may be made by the due date of the income tax return for the year (including extensions).

401(k) Plan

For businesses with a net annual income above $15,000, a 401(k) may be preferred over a SEP or a SIMPLE IRA because it allows the small business owner to contribute more to the retirement plan.  As with an SEP or a SIMPLE IRA plan, a 401(k) plan has a salary deferral component and an employer contribution component.  For 2011, the maximum salary deferred contribution component is $16,500 (or $22,000 for those ages 50 or older).  Additionally, a small business owner can make a maximum employer contribution of 25% of his or her own compensation.  The total that can be contributed to a 401(k) plan in 2011 is $49,000 ($54,500 for those ages 50 or older) or 100% of compensation, whichever is less.

Deferrals to a 401(k) must be made no later than 30 days after which the contributions are received.  Thus, if a contribution was received on December 31, 2011, the deadline would be 30 days later.

One drawback to a 401(k) plan is that there is a reporting requirement.  Access Form 5500, Annual Return /Report on Employer Benefit Plan at: http://www.dol.gov/ebsa/5500main.html

As with the SEP and SIMPLE IRA plans, elective contributions made to the plan are generally made on a pre-tax basis.  By electing to defer his or her own compensation and by contributing to the employees plans, the small business owner can substantially reduce the taxable income for the business for the current year.  

Bankruptcy Protection

It is worth noting that retirement accounts under SEP, SIMPLE IRA and 401(k) savings accounts are generally completely protected from bankruptcy.  This is an added bonus for small business owners who struggle to survive in this economy and are unsure about what the future will hold for their businesses. 

Whether you are a small business owner trying to identify the right retirement plan for your employees or a solo practitioner looking to identify significant tax deductions for your business, the attorneys and tax professionals at the Law Offices of Stephen Moskowitz, LLP can help you.  Call me at 1-888-829-3325 or (415) 394-7200 for your attorney-client privileged consultation and let us help you devise the right retirement strategy for your situation.

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