If there’s one thing that there’s never enough of at a startup, it’s money. So naturally, entrepreneurs believe that there’s no way they could offer benefits to their employees. Heck, they can hardly even offer a salary! But that’s a mistaken belief. Not only are there a few ways to offer benefits to employees, but there’s even tax breaks for doing so!
There are a few options when it comes to retirement accounts for your small business. The top two options for most small companies (think less than 20 employees) is a SEP IRA or a Payroll deduction IRA. These are super easy to set up and require very little maintenance. Especially if you’re already doing payroll in house, the most you’ll have to do is add an extra entry for retirement deductions.
1. Payroll Deduction IRA – This is the simplest form of retirement account for your employees. All you need to do is have each employee create a traditional or Roth IRA for themselves, then have each employee decide a contribution amount to be deducted from each paycheck (in 2017 the limits are $5,500 per year for people under 50 years old, and $6,500 per year for people over 50). Then with each paycheck, you just withhold the amount the employee designated, and have it sent over directly to their retirement plan custodian (usually their broker, like Fidelity, Schwab, or Vanguard).
The downside here is that the company doesn’t qualify for tax breaks on these kinds of accounts, because a payroll deduction IRA isn’t a “qualified” retirement plan. It’s still a great option for employees, especially younger employees who can benefit from ROTH accounts. But if you’re looking for the corporate tax breaks, then there’s a better plan for you.
2. SEP IRA – With a SEP IRA, you can contribute as your company to your employees’ retirement accounts. The great thing about a SEP is that you don’t have to contribute if money is tight, and you don’t have to contribute the same amount each time. You can pick and choose when there’s money available for the employees and when there isn’t. That means you could contribute an extra 5% to each employee in one month, but only 1% or even nothing in another slower month.
There are some limitations to the SEP IRA though. One of those limitations is that if you do choose to pay your employees, you have to pay them all on the same percentage of their income. So if you pay Bob an extra 3% in his SEP account, then you have to pay Sally 3% in her account as well. That’s not a huge problem, because you don’t have to pay anyone if you can’t afford it. So just make sure to do the math ahead of time to see how much you can afford to pay everyone. If you can only get away with 1%, then do that.
With a SEP IRA you can also get a tax credit. A tax credit works great for your business, because it takes money directly from your tax bill. A tax deduction is where you can reduce your income and that will lower your taxes, but with a tax credit, you directly reduce your tax bill by up to $500 for 3 years straight.
In order to get the tax credit you’ll need to fill out Form 8881. [Credit for Small Employer Pension Plan Startup Costs] This allows you to claim the startup costs associated with a SEP IRA as a tax credit. Now, this would normally seem like a wash, right? I mean you can’t claim the credit without a startup cost, which means it still has to cost you something up front. Well, yes that’s true, but a SEP IRA actually doesn’t have any startup costs. It’s completely free to open a SEP IRA with most of the big name brokerage companies [click here to read more about brokerage companies and how they work]. So how can you claim SEP Startup costs?
Well the list of approved expenses can help clarify that.
- Set up and administer the plan, and
- Educate your employees about the plan.
What does that mean? Well the setup costs are out the window right off. SEP IRAs don’t have set up costs. But the cost to educate your employees about the plan, now that could be a benefit. If you have a financial planner on hand who can educate your employees about what a SEP IRA is, how to properly save for retirement, and what kinds of investments are necessary, then paying that financial planner could count as education for the employees. And that pay could directly translate into a tax credit.
That’s where I come in. Arbogast Advisers can educate your employees about the SEP IRA, allowing you to claim the tax credit, and offer benefits to your employees without a huge up front expense. The maximum you can claim in startup costs is $1000 per year for 3 years, and that would translate to $500 in tax credits (you get a credit of 50% of the plan cost). While you have us in your business for the retirement plan, you could also offer general financial planning to your employees. Since you’re already incurring a cost for implementing the plan, Arbogast Advisers can implement financial planning advice for your employees at a significantly reduced rate. Thereby allowing you to increase the benefits to your employees without increasing the costs. And since you would have to pay that money in taxes anyway, it’s actually a free benefit to your employees, and extra benefits means you can attract and retain top talent in your industry.
For more information about implementing retirement plans for your employees, contact Jaycob at Jaycob@ArbogastAdvisers.com.
[Disclaimer: The retirement accounts discussed in this article do not constitute an exhaustive list, nor does this article constitute a recommendation to the reader. Some accounts may be better than others, and you should consult a professional before deciding on the right retirement account to choose for yourself or your company.]