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Business Owners: No more excuses
By Ron Rada |
Are you hesitant to set up a business retirement plan because you are concerned about the cost and the administrative hassle? Consider this: There is a business retirement plan that is inexpensive ($30 or less per participant) easy to set up, and requires no IRS reporting. It’s called a Simplified Employee Pension (SEP) plan, and you have until your tax filing deadline to set one up. Sound good?
Or maybe you haven’t set up a business retirement plan because you don’t want to be required to make a contribution on behalf of your employees? Consider this: Your tax savings on the deduction for a contribution can be more than the required contribution of your employees. Consider the following example:
John owns a business (corporation) and has two full-time employees. Assume John wants to make a 10% contribution to his SEP.
|
Salary
|
Contribution (10%)
|
| John (Owner) |
$124,030 |
$12,403
|
| Polly |
$24,000 |
$2,400
|
| Ray |
$21,000 |
$2,100
|
| A) |
Total contributions to employees |
$4,500 |
| B) |
Contribution for John |
$12,403 |
| C) |
Total contributions |
$16,905 |
| D) |
Taxes saved (C+ business tax rate, 34%) |
$5,747 |
|
John’s contribution $12,403/$16,903 |
73.4% |
Key Point: John receives $12, 403 for himself, which is 73.4 percent of the total amount contributed. The $5,747 he saves on taxes covers the cost of contributing $4,500 for his employees.
Note: This is an example and will not hold true for all employers.
Contributing to a business retirement plan also can be a good alternative to a bonus. Because SEP IRAs are not part of payroll, they are not subject to the payroll taxes that apply to a bonus. Consider the following example:
Cost to business owner:
Employer Retirement Plan vs. Bonus System
Retirement
Systems |
Wage or Bonus System
|
Plan Contribution
|
Employee
Benefit
|
Employer
Cost
|
Employee
Benefit
|
Employer
Cost
|
|
$2,000
|
$2,000
|
$2,000
|
$2,000
|
|
Federal Tax (15%)
|
<$300>
|
–
|
–
|
–
|
|
State Tax (5%)
|
<$100>
|
–
|
–
|
–
|
|
F.I.C.A. (7.65%)
|
<$153>
|
–
|
–
|
–
|
|
Total Benefit
|
$1,447
|
$2,153
|
$2,000
|
$2,000
|
As you can see, because there are no payroll taxes, the contribution to a SEP is more favorable to both the employer and the employee.
In addition to SEPs, a variety of retirement plans are available to business owners. These include SIMPLE IRAs, Profit Sharing, Money Purchase Pension and Defined Benefit plans. These plans, with the exception of SEPs and SIMPLE IRAs, must be established by the business’ year end to make a contribution for that given business year. A SIMPLE IRA must be set up by Oct. 1. A SEP, on the other hand, can be established and funded up through the business’ tax filing deadline.
(Editor’s Note: Ron Rada is an Investment Representative with Edward Jones in Port Orchard. He can be reached at (360) 876-3724.) |
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