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How To Set Up A Profit Sharing Plan For Self Employed?

Setting up a profit sharing plan requires a certain amount of ground work that needs to be put in before you can actually start contributing to the plan.

At first you need to determine the maximum amount that can be contributed as per IRS regulation. This limit is equal to the lesser of (I) 25% of the total eligible payroll (ii) $54,000 for plan year 2017.

Determining the total payroll is not as simple as it seems. If your business is incorporated as an S-Corp, the payroll would be the W-2 compensation that you take. If your business is incorporated as a Sole-prop, things get caught up in a circular loop and cannot be done without using software programs specifically designed for this. Please feel free to email us at and we can do the calculations for you.

For example, if your W-2 income is $100,000, the 25% limit is $25,000 which will be the maximum permitted contribution amount.

Once you have determined the maximum limit, you need to decide what amount are you comfortable contributing. You should consult with your CPA before finalizing the amount as it should not result in a corporate loss.

If you are above 50, the $54,000 limit will be increased by coupling the profit sharing plan with a 401(K) plan. If you do actually want to contribute more than $54,000, please reach out to us at and we can determine the appropriate strategy to do so.

To read more about profit sharing plans, please visit our website.

Every profit sharing plan requires a plan document which will list all assumptions of the pension plan and ensure compliance with all IRS rules and regulations. This document has to be drafted by a pension specialist before you can set up the investment accounts for the plan. A new TIN may need to be registered for the pension plan as it is a distinct legal entity. The pension specialist will customize a plan document based on the contributions you need. Make sure you enable the provision to take a loan from the profit sharing plan as a few thousand dollars can always come in handy for a business owner.You can read more about a pension plan document here.

After the plan document has been drafted, you are all set to open the investment account for the plan. You should reach out to your financial advisor or a broker to set up the accounts. Make sure you tell them to open a ‘qualified account’ so that the investment gains are not taxed at source.

You can start making contributions to the plan as and when free cash flow is available once the investment accounts are open. All deposits need to be made before you file the tax returns for your business.

All qualified plans are required to file annual returns with the IRS. Note that these returns are different from the company tax returns and your personal tax returns. Also note that most CPA’s or financial advisor’s cannot file these returns since the IRS requires a separate Form 5500 for pension plans.

The penalties for not filing these forms run in to hundreds of dollars and the pension plan could end up getting disqualified.

If you are a self employed individual and interested in exploring the idea of a profit sharing plan for yourself feel free to give us a call or email us at . We specialize in this area and can provide you with valuable advice and services that could end up saving thousands of dollars and giving a boost to your retirement planning.