Originally Posted by Mickey123
I've set up my LLC consulting practice, which include myself and my wife. We file our taxes as a corporation. I want to setup a pre-tax employer funded retirement program, 1) to reduce taxes on profit 2) to increase deductable expenses. My wife recently obtained a job with another company that she contributes to a 401k with a salary deferral of $17,500. What would be the best type of plan to reduce taxable profit, which means less profit and maximize the LLC deductable expenses...SEP, Profit Sharing, Safe Harbor 401k Profit Sharing Solo 401k Simple IRA etc. Some years we have a profit, other years we break-even.
Any suggestions are welcomed.
I guess it is really hard to tell easily as there must be both advantages/disadvantages in each plan. The IRS allows s-corps to offer retirement plans designed to defer income to employees. Of course, owners are most often interested in these plans, although rules prohibit discrimination in order to qualify for tax deductions. Annual limitations are subject to change. The IRS may change limits and other rules annually, so be wary of your current limitations before contributing and setting up employee payroll contributions.
SEP plans, provide s-corp employees the ability to defer income through a qualified retirement plan. Contrary to other retirement plans, employees do not make contributions to SEPs. All contributions are made by the business and must adhere to a written allocation formula. Plan contributions must not favor highly paid employees. According to the IRS, the maximum contribution employers can make to each employee is the the lesser of $49K or 25 % of the each respective employee’s total compensation.
Simple IRA plans allow contributions from both the employer and employees. The IRS limits employee contributions to $11.5K and employer contributions to up to three percent of an employee’s salary. Employees receive deferred income and the s-corporation receives a retirement plan deduction for qualified contributions made for employees. Employees over 50 are able to make an additional $2,500 catch-up contribution per year. Small businesses commonly use trustees to manage retirement plan funds. Defined benefit plans such as 401Ks allow employees to contribute up to $16.5K annually, and $22K for employees age 50 and over. The IRS limits employer contributions to 3%. To qualify for tax benefits, plans must not discriminate in the allocation of matching employer contributions. Small businesses commonly hire a retirement plan administrator to set up new plans. Employees can acquire loans against their respective retirement accounts. The IRS provides a small business booklet with additional details on the formation, rules and regulations surrounding 401(K) plans.
Employee stock ownership plans provide an s-corp the ability to shelter tax profits in a retirement plan. Unless there is a sale of stock, annual contributions become deferred income. The IRS requires that distributions from the corporation's retained earnings be made in accordance to ownership, therefore the ESOP is required to receive distributions if other shareholders take distributions. ESOPs with larger ownership shares may receive more benefits than was originally intended because of distributions.
For more accurate info in deytail, you need to consult an enrolled agent, a tax professional licensed by the Department of the Treasury or a CPA doing tax returns.