If you are a small business owner, the Internal Revenue Service (IRS) rules enable you to make significant contributions to your own 401k retirement plan when it is combined with a Profit Sharing Retirement Plan.
The 401k feature of your retirement plan enables you to defer up to $18,500 of your salary or earnings in 2018. If you are age 50 or older in 2018, you can defer up to $24,500 in 2018.
For 2019, the limits are increased to $19,000 and $25,000 respectively.
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Small Business - Sole Owner - Self Employed 401k - Profit Sharing Plan
Tax Advantages of a 401k - Profit Sharing Plan
The tax advantages are maximized if your small business has no employees except either you, your spouse or other co-owners.
The business can be either a individual sole proprietorship, a corporation or a partnership.
If your small business has other employees, the financial advantages are
lessened because the IRS requires your business to make a profit sharing contribution on behalf of those employees.
401k - Profit Sharing Plan
Contribution / Deduction Limits For 2018 & 2019
First of all, your small business must be generating earned income. Earned income from an unincorporated business is the net earned profits from that business.
Your earned income from a corporation would be your W-2 salary from the corporation. The corporation can be either a C or S corporation.
The main difference between these two types of corporations is that C corporations pay income tax on their profits; S corporation profits are taxed on the individual shareholders personal income tax returns.
Sub-Chapter S Corporation is another name for a S corporation.
The tax savings for a 401k - Profit Sharing deduction will vary because of an individual's personal tax situation. The tax savings will be somewhere between 10% and 35% of the deduction.
For instance, if you were in the 22% tax bracket, a 401k - profit sharing deduction of $30,000 would result in a federal income tax savings of $6,600. Depending upon the state where you reside, there also could be additional state income tax savings.
If your small business is a C type corporation, the corporate income tax savings from your retirement plan deduction will be 21% of the deduction.
You can establish your 401k - Profit Sharing plan through a financial institution such as a mutual fund company, a securities brokerage firm, a bank, or an insurance company. There are also 401k retirement plan specialists who can design and customize your retirement plan.
If you are age 50 or older in 2018, the total maximum is $61,000. The limit for 2019 is increased to $62,000.
A great advantage of this 401k - Profit Sharing Plan is that you are not locked into contributing a certain amount or percentage every year.
If your income has decreased in a certain year, you have the flexibility of lowering your 401k - Profit Sharing contribution. You can vary the profit sharing percentage from 25% of your salary or earnings to all the way down to zero%.
It works the same with the 401k salary or earnings deferral. You can have a maximum 401k deferral of $18,500 in 2018 ($24,500 age 50) or all the way down to a zero deferral.
The total amount of both the 401k deferrals and the profit sharing contributions are limited to a maximum of $55,000 in 2018.
The maximum amount for 2019 is increased to $56,000.
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If your small business is a corporation, the 401k - Profit Sharing contribution is deducted as a business expense on either your Form 1120 or Form 1120-S Federal Corporation Income Tax Return.
A 401k - Profit Sharing plan has significant income tax advantages; plus it forces you to save for your retirement. You can enjoy these income tax benefits no matter what is the size of your earnings.
If you are a sole proprietor, your 401k - Profit Sharing contribution becomes a tax deduction on the first page of your Form 1040 Individual Federal Income Tax Return.
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