Your Small Business 401K Plan.

401K plans are just not for large corporations.  Your small business can also establish a 401K plan --- whether it be a self-employed sole proprietorship; a small corporation; or a partnership. 

The IRS rules also allow you to combine a Profit Sharing Plan with your 401K plan.  This can allow you to make significant tax deductible contributions to your retirement plan.  You also could still have a personal IRA account for even more tax advantages.

The tax advantages are maximized if your small business has no employees except either you, your spouse or other co-owners.

If your small business has other employees, the financial advantages are lessened because the IRS requires you to make a profit sharing contribution on behalf of these employees.

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 corporate income taxes on their profits --- while S corporation profits are taxed on the individual shareholders personal income tax returns.   Sub-Chapter S Corporation is another name for a S corporation.

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 small business retirement plan.

401K - Profit Sharing Plan Income Tax Deductions

The 401k feature of your small business retirement plan allows you to tax defer up to $19,500 of your salary or earnings in 2021 and $20,500 in 2022.

If you are 50 or older in 2021, you can defer up to $26,000. If you are 50 or older in 2022, you can defer up to $27,000.

The profit sharing feature of your small business retirement plan allows you to make an additional contribution of up to 25% of your salary or earnings.  A great advantage of the profit sharing feature 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 profit sharing contribution.  You can vary the profit sharing percentage from 25% all the way down to 0%. 

There are IRS limits as to the total of contributions allowed for a 401k - Profit Sharing Plan.  For 2021 the total amount of both the 401k salary deferrals and the profit sharing contributions are limited to $58,000 and $61,000 in 2022.

If you are 50 or older in 2021, the limit is 64,500 and $67,500 in 2022.