Taxes

What are the tax benefits you can rely on when offering a 401(k) plan?

  • 4 min Read
  • May 6, 2022

Author

Escalon

Table of Contents

Salaries. Rent. Office supplies. Utilities. There are several business expenses that can be claimed as tax deductions. But were you aware that your 401(k) plan contributions also offer significant tax benefits? 


Background

: A “401(k) Plan is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions such as matching the employee’s contributions up to a certain percentage. SIMPLE and safe harbor 401(k) plans have mandatory employer contributions,” according to the IRS.


Read on to find out the various tax credits and deductions you can claim when offering a 401(k) plan to your employees.


Tax credits



The SECURE ACT (Setting Every Community Up for Retirement Enhancement) Act, a bipartisan, retirement-related bill, was passed at the end of 2019. It allows eligible small businesses to claim a tax credit for taking on a new 401(k) plan and/or a new automatic enrollment feature:


Qualified startup costs

– Before the SECURE Act came into force, a small business could claim a tax credit equal to 50% of their qualified startup costs, up to a maximum of US$ 500. 


Now, the limit is the greater of (1) $500 or (2) the lesser of $250 multiplied by the number of nonhighly compensated employees eligible for plan participation or $5,000. This credit is available for up to three years.


The IRS defines a highly compensated employee as “An individual who:


1. Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or


2. For the preceding year, received compensation from the business of more than $125,000 (if the preceding year is 2019, $130,000 if the preceding year is 2020 or 2021 and $135,000 if the preceding is 2022), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.”


Talk to us about how our outsourced business services can help your firm streamline the tax compliance process and make the most of available tax benefits.



Automatic enrollment

– Adding an automatic enrollment feature to a 401(k) plan can earn a small business an additional $500 tax credit. The credit is available during the first three years the feature is in effect. 


Tax deductions

 


Tax credit deductions are available for all businesses for 401(k)-related expenses, including: 


Employer contributions

– Contributions made by employers to their 401(k) plans can be deducted if they include matching, safe harbor and profit sharing contributions. 


The amount of deduction is limited to 25% of the total compensation earned by participants of the plan during the financial year. Total compensation includes elective deferrals; however, deferrals are not counted against the 25% deduction limit.


Administration fees

– When the plan sponsor pays the 401(k) administration fees, participants of the plan are not the only beneficiaries – business owners can also deduct the fees as a business expense. 


The bottom line



The employer match in a 401(k) plan is an attractive benefit for recruiting. If a job applicant has multiple offers and where everything else is at par, the 401(k) contribution matching could become a deciding factor in selecting one company over another.


Also, businesses receive tax benefits for contributing to 401(k) accounts. Specifically, their matches can be deducted from their federal corporate income tax returns. They are also often exempt from payroll and state taxes.


Want more?

Escalon can help you get peace of mind by ensuring that your accounting, financial records and taxes are accurately done. Talk to an expert today.

Talk to our team today to learn how Escalon can help take your company to the next level.

  • Expertise you can trust

    Our team is made up of seasoned professionals who bring years of industry experience to the table. You gain a trusted advisor who understands your business inside out.

  • Quality and consistency

    Say goodbye to the hassles of hiring, training and managing in-house finance teams. You will never have to worry about unexpected leave of absence or retraining new employees.

  • Scalability and Flexibility

    Whether you’re a small business or a global powerhouse, our solutions scale with your needs. We eliminate inefficiencies, reduce costs and help you focus on growing your business.

Contact Us Today!

Tap into the latest insights from experts in your industry

Accounting & Finance

October 15 Tax Deadline: What to Double Check Before You File

If your business or personal tax return was extended back in April, October 15 is the final deadline to submit....

Accounting & Finance

Key Financial Deadlines Every SMB Should Know for Q3 and Q4 

For small and mid-sized businesses, the second half of the year often comes with increased operational demands, from budgeting and...

Small Businesses

From Bookkeeping to Strategic Finance: Preparing Your Family Business for Growth

Is Your Family Business Ready for Its Next Chapter? As a family business leader, you've built something remarkable. Through years...

Accounting & Finance

Subscription Revenue in 2025: Fatigue, Churn, and the Imperative to Diversify 

For much of the last decade subscription models symbolized modern growth, predictable revenue, sticky customer relationships, and rising valuations. But...

Accounting & Finance

Closing the Books in Q4: Common Mistakes That Delay Reporting 

Closing the books at year-end is one of the most important financial events for any growing business. It sets the...

Leadership & Growth

Building a Scalable Tech Stack: How to Choose the Right Tools for Growth 

In today’s business landscape, technology is more than a convenience—it’s a strategic asset that can supercharge growth. But as you...

People Management & HR

The Role of HR Analytics in Strategic Decision-Making 

In the era of big data, human resources (HR) analytics has emerged as a powerful tool that can transform how...

Accounting & Finance

Understanding Customer Lifetime Value and Its Impact on Strategy 

In the world of business, not all customers are created equal. Some make one small purchase and disappear, while others...

Accounting & Finance

Tax Strategies for Succession Planning in Family-Owned Businesses 

Succession planning in a family-owned business is a delicate dance that involves not only leadership and emotional considerations, but also...