• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

Corporate Tax Return Prep

Corporate Tax Return Prep

Let Us Handle Your Corporate Taxes

Call us: 781-849-7200
contactus@worthtax.com

  • Home
  • Corporations
  • S-Corps
  • Partnerships & LLCs
  • Business Planning
  • IRS Tax Problems?
  • Why Worthtax?
  • Our Tax Team
  • Tax Guide
  • Secure Client Portal
  • Blog
  • Resources
  • Locations and Hours
  • Schedule an Online Appointment

The Many Benefits of 401(k) Profit-Sharing Plans

August 11, 2021 by Alex Franch, BS EA

If you are an employer looking for an attractive employee benefit that lets you plan contributions around your revenues, consider a 401(K) profit-sharing plan. These plans allow you to make pre-tax deposits to your employees’ eligible retirement accounts after the end of each calendar year, providing the flexibility to determine exactly how much you want to contribute based on your finances and goals.

The Top Five Advantages of 401(K) Profit-Sharing Plans

You can pay out tax-advantaged bonuses

If your company pays employees year-end bonuses, 401(k) profit-sharing contributions can be an excellent part of that plan. They tax-deductible to your company and don’t increase employees’ taxable income, and are not subject to federal withholding, all while adding to their retirement savings. These value-added benefits make the 401K profit sharing contribution a great way to enhance your annual bonus program. 

It adds to your ability to reward Highly Compensated Employees (HCEs)

One of the few drawbacks to 401K plans is the annual deferral limit that the Internal Revenue Service places on contributions. These limits ($19,500 in 2021) prevent Highly Compensated Employees from maximizing the amount that can be contributed to their accounts based on compliance limits for nondiscrimination testing. Profit-sharing plans circumvent these restrictions, allowing a combination of up to $58,000 (with an additional $6,500 catch-up if an employee is over age 50) to be contributed as a bonus. 

It provides additional flexibility for budgeting

As nice as it would be to promise high bonuses for year-end, unpredictable revenues make doing so a recipe for disaster. By paying out bonuses in the form of 401(K) profit-sharing contributions, you can assess exactly what you can afford and make the contribution any time before the tax filing deadline – including any extensions you choose to take. Doing so maintains the ability to deduct the contribution on the previous year’s tax return too. 

Plans allow contribution vesting

Bonuses and 401(k) plans are valuable recruitment tools, and they can be powerful retention tools when they are structured to vest with the employee’s tenure. Employees considering leaving in a short time frame will lose any portion that has not yet vested. 

It can be built into your existing 401(k) plan with no additional work

Signing your company up for a 401(k) plan takes time and effort, but once it is in place you can easily add a profit-sharing plan, and many retirement plan providers will add the program without charging an additional fee.

The disadvantages of profit-sharing plans

As much as our country favors 401(k) plans, including those that incorporate profit-sharing plans, there are a few things that need to be kept in mind.

  • There are limits to how much can be contributed for each employee. The total of employee deferrals and employer deposits cannot be greater than 100% of the employee’s compensation. 
  • You are limited on how much you can contribute for any employee a year. In 2021 that limit is $58,000, or $64,500 for employees over the age of 50. 
  • Employer contributions may be limited by an employee’s annual compensation. For 2021, no contributions were allowed for employees earning more than $290,000. 
  • Only contributions of up to 25% of total employee compensation can be deducted by employers.

Acknowledging the contributions that your employees make is an integral part of keeping your workforce morale upbeat, and profit sharing is a powerful tool in support of that goal. If you have questions about how to approach 401(k) profit sharing for your business, contact our office.

  • Facebook
  • Twitter
  • Buffer
  • Evernote
  • AOL
  • Gmail
  • Print Friendly
  • Yahoo Mail
  • LinkedIn
  • StumbleUpon
  • Tumblr

Filed Under: Tax Planning Tagged With: 401(k), Employee, profit-sharing

About Alex Franch, BS EA

Ready to get started on your corporate taxes?

781-849-7200      Email

Schedule an Online Appointment      Upload Files to Our Secure Client Portal

Primary Sidebar

  • Home
  • Corporations
  • S-Corps
  • Partnerships & LLCs
  • Business Planning
  • IRS Tax Problems?
  • Why Worthtax?
  • Our Tax Team
  • Tax Guide
  • Secure Client Portal
  • Blog
  • Resources
  • Locations and Hours
  • Schedule an Online Appointment

Calculate Your Estimated Tax Responsibility

tax calculator, calculate your taxes

RSS Recent Posts

  • Shark Tank Investor Daymond John: His Story So Far
  • This Month’s Success Story: The Founder of WhatsApp
  • IRS Announces Mid-Year Optional Vehicle Mileage Rate Increase
  • July 2022 Business Due Dates
  • With a Possible Recession Looming, You May Want to Review Your Cash Flow Process
  • Forgot Something on Your Tax Return? It’s Not Too Late to Amend the Return
  • June 2022 Business Due Dates
  • Why Employee Classification is of Paramount Importance
  • Tax Issues That Arise When Converting a Home into a Rental
  • Seek Tax Advisor Recommendations Before Selling an Investment Property

Get started now on your corporate taxes.

     781-849-7200      

            Email            

   Online Appointment  

Upload Files to Our
Secure Client Portal Here
Receive a Free Subscription to Our Newsletter

© Copyright 2022 Worthtax · All Rights Reserved