Small businesses that optimize tax deductions and credits are typically more profitable than those that don’t. Offering benefits to your employees improves employee retention. These are not opinions. Retirement savings and healthcare plans are investments in your company’s financial well-being. This article will explain why. Some key takeaways to look for:
- The 2025 IRS total annual contribution limit for 401(k) and 403(b) plans is $70,000, including the employee contribution and the employer match.
- Employer contributions or matches are made pre-tax, so they reduce the employee’s tax liability. Distributions in retirement are taxed as income.
- Distributions of the employer-contributed portion of an employee retirement plan are exempt from FICA, Medicare, Social Security, and federal unemployment tax.
Employer Contributions to Retirement Plans
The 2025 annual contribution limit for employees who participate in 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan is $23,500. That doesn’t include catch-up contributions for workers over fifty or employer matches. The total contribution limit, including the employer match, is $70,000.
Employer matches are made pre-tax, so you’re paying your employees what you’d otherwise pay taxes on. This is particularly important for pass-through entities because it reduces personal income and potentially puts you in a different tax bracket. Other business entities benefit by minimizing corporate tax liabilities and increasing shareholder equity.
Understanding the tax benefits of contributing to employee retirement plans is essential for employers looking to improve retention. Benefits should enhance compensation packages. Viewing them strictly as an expense can cause some companies to reduce salaries and recruit based on the total package. Prospects will see right through that.
Contributions to SEP-IRAs and SIMPLE-IRAs
Independent contractors and freelancers don’t get employer matches on their retirement plans because they are the employer. A simple employee pension (SEP) IRA is an alternative to consider. The 2025 annual contribution limit for a SEP-IRA is $70,000. Limits for traditional and Roth IRAs are only $7,000, so you can save significantly more with this option.
Self-employment might be your dream, but it can be expensive if you don’t do it right. Independent contractors and freelancers pay self-employment tax. They don’t have an employer making quarterly tax deposits on their behalf. That increased liability often comes as a surprise at the end of the year. A SEP-IRA can offset some of it.
A savings incentive match plan for employees (SIMPLE) IRA is another option for self-employed individuals who want to grow into companies with employees. This year’s annual contribution limit for a SIMPLE-IRA is $16,500 with a maximum employer match of 3% of the employee’s income. Contact our office if you’d like to set this up.
Tax Benefits for Employers
Employer contributions to retirement plans are made pre-tax. They’re listed on the income statement as an expense, so they’re subtracted from your annual revenue. Aside from the obvious tax benefit, the ending balance on the income statement is the opening line on the balance sheet. That ultimately affects shareholder equity.
This financial reporting process should be incorporated into long-term business planning. Employer contributions are 100% deductible up to 25% of covered payroll. Employees also get a break because distributions of the employer-contributed portion of their retirement plan are exempt from FICA, Medicare, Social Security, and federal unemployment tax.
Small business tax planning can be complicated and confusing. A certified public accountant (CPA) knows how to do it. Most business owners don’t. If you need help, our team is happy to assist you. We can work with you to choose the right retirement savings plan and optimize your tax deductions and credits. Call our office to learn more.
Employer Contributions to Healthcare Plans
Employer-provided health insurance is mandatory under the Affordable Care Act (ACA) for businesses with over fifty employees. Smaller companies don’t have the same mandate, but you can visit HealthCare.gov to find cost-effective options. Consulting an insurance professional is prudent because the regulations and guidelines change frequently.
Health insurance premiums and contributions to Health Savings Accounts (HSA) are exempt from payroll and federal income tax. Like retirement savings contributions, they’re deductible for employers, up to 50% of your employee’s premium costs. You can also set up a Health Reimbursement Account (HRA) that offers additional tax benefits.
Good health insurance encourages employees to address health issues. Their vigilance in this area benefits your company because a healthy workforce is more productive. In other words, paying employee health insurance premiums should never be a burden. It’s beneficial to them and your business’s bottom line. You’ll see that when we do the math.
Common Mistakes and Compliance Pitfalls
There are several moving parts in this equation. Maximum contribution levels change every year. Employee limits increase when they hit age fifty. Health insurance has become a political football. As CPAs, our job is to stay abreast of all these changes. We also keep track of any new deductions or credits your business might benefit from.
Another issue is health insurance deadlines. There are enrollment periods and coverage lapses under certain circumstances. These are best left in the hands of insurance agents and compliance experts. The larger your business gets, the more eyes you need on it. Your human resources department is a good place to assign this responsibility to.
Strategic Tax Planning Considerations
Balancing retirement and healthcare offerings helps you maximize tax benefits while meeting employee needs. Industry-specific considerations, like increased liability coverage and health care riders for hazardous employment, add layers of complexity to your future planning and scalability.
D&M Accounting Services can help you navigate the potential pitfalls of retirement plans and healthcare deductions. Our team works with small business owners, independent contractors, and freelancers to maximize profitability and minimize tax liabilities. Contact us today for an initial consultation. We’re standing by to assist you.
