As a self-employed individual with employees, you care about their well-being. However, sometimes you are strapped for cash and cannot consistently contribute in their retirement account. A profit sharing plan is a great way to retain good employees with no annual obligations. If your profit sharing plan is well designed, it is a great way to attract and keep talents.
I know sometimes it is cheaper to outsource especially when outsource labor tends to be very cheap. However any self-employed individual really thinking of growing their business need to know how to attract and retain talent. Even though hiring employees is not the only way this is done, it is one of the most effective ways.
The profit sharing plan allows you as an employer to make large contributions for your employees. To establish this plan you must arrange for a trust fund to hold the plans assets. In 2014, you can contribute the lesser of 100% of wages or $52,000.
The plan must be offered to all employees who meet the following qualifications:
- 21 years of age
- Worked at least 1,000 hours in a previous year
You as the employer chooses when employees are vested in this plan. As the owner, you are also considered an employee for purposes of administering the plan.
Profit Sharing Plan Contributions
You can decide how much you want to contribute in the plan. Which means in years, the business is not doing so well you do not have to contribute
Communicating plan to employees
Once this plan has been set up, you must communicate the details of the plan to your employees:
- When your employees become eligible to participate
- How much you contribute to the plan
- When employees become vested
- How to file a benefit claim
- Their rights and responsibilities under law.
Sole owner
If you are the sole owner of your business, you will be better served setting up a 401K or alternative plan. The profit sharing is a great way to retain talent but not the best plan for the sole owner.
Summary
As a self-employed individual, it is very easy to focus on today and not plan for your future “financial freedom”. Retirement planning is a great way to meet your future financial needs, and should not be ignored. A well designed profit sharing plan is one of the ways you can plan for both you and those who work under you.
Go to part 1 of series 401K Simple IRA SEP IRA Payroll Deduction IRA Profit Sharing Plan