This is it! We’ve come to the end of our series on the CalSavers Program; what it is, who it benefits, who it doesn’t benefit, rules, regulations, and some strategies. Today, we are going to talk primarily about corporate tax benefits between using a Qualified Retirement Plan, and how those benefits will disappear by using CalSavers. In essence, this article is on how to effectively, and legally, reduce your corporate and personal tax liability as a business owner through the smart usage of a Qualified Retirement Plan.
Let’s be clear about the tax benefits for businesses who will be forced to implement CalSavers if they don’t start or already have a suitable retirement plan for their employees. Zero. Nothing. As an owner you will have the same total labor costs, business expenses, and headaches you had before. The only difference is that you, or someone on your staff will have to track the payroll contributions for your employees and submit payment to the administrator of the CalSavers plan, Ascensus College Savings Recordkeeping Services, resulting in reduced productivity. If you as the business owner is being forced into accepting a reduction in productivity for complying with a state mandated program of this magnitude, shouldn’t there be some kind of benefit for the business? My thoughts exactly.
Don’t wait for the State of California to force your hand. BE MONEYWISE.
So how can you as a business, who is already being forcibly nudged into reduced productivity, make this a positive for yourself and your business and take advantage on a different path? First, you need to find a way that allows you to benefit in a real and constructive way by reducing your tax liability. Second, you need to take advantage of the types of programs that allow you to reduce your taxes, legally. Let’s look at a couple of different scenarios and how they affect taxes. First up, let’s look at using CalSavers.
First, some details. You are 52 years old and run a small manufacturing business that makes about $4 million in annual revenue. You have 8 employees besides yourself, and your total W-2 payroll for those employees (excluding PTO, health premiums, etc.) is $500,000. If we include those benefits, your labor costs are around $600,000. As the owner of the company, you pay yourself $80,000 in W-2 wages. After all business expenses, deductions, blood, sweat, and tears, you made a “profit” of $250,000, and a federal tax bill of around $55-$60k. You do not have a qualified retirement plan to offer to your employees, and therefore are required to use CalSavers starting in 2023.
In this scenario, if all of your employees fail to opt out of the CalSavers program, you would be required to track the payroll processing for all employees and send a check to Acsensus every payroll period. In this case, about $1,100 per pay period would be sent to the plan administrator, and you as the business owner would have zero tax benefits. As the owner and employer, you have put $4,000 into a retirement vehicle for yourself. Not bad, and really no cost to you as the owner in this scenario, but $4,000 per year into a retirement plan just isn’t going to get the job done, and there are no tax benefits to your company for taking this route.
Are you and your company MONEYWISE?
Let’s take the same manufacturing company from above, but they opt to use a properly built and administered Safe Harbor 401k plan for their employees. In this scenario, your employees get to choose whether they want to contribute or not, but let’s assume that everyone participates in the new plan. All of your employees contribute 5% of their pay to the plan, and your matching contribution of 4% brings your combined per pay date contributions to around $1,700, of which about $700 is from you the employer in matching contributions. Here is where things get a bit more interesting. Since you are providing a matching contribution that is benefiting your employees, you are able to contribute $19,000 per year into a 401k plan; $25,000 if you are over 50 years old. If you would like to make sure that your take home pay stayed the same as before, you could pay yourself a bit more in W-2 wages to make up the difference. So, for a 52 year old owner, paying themselves $105,000, they could contribute $25,000 before taxes, and still have a take home pay of an $80,000 per year. Add the 4% match of $4,200, and the employer’s total contribution into their own 401k is $29,200. You’re total cost as the employer is around $50,000 per year to administer the plan, and you get to keep $29,200 of that in your own account.
Using the information from above, this company’s “profit” of $250,000 is now reduced to less than $200,000 because of your wage increases, matching contributions and some plan expenses. But take a closer look; those lost profits are not being truly lost, they are just being redirected mostly to you and (some) to your employees on a tax deferred basis. This move would save the company over $11,000 in federal Income taxes, and allow you to put almost $30,000 away for your future self. I don’t know about you, but I would rather pay my employees a bit more and my government a bit less. In this scenario, you would give your employees about $18,000 in matching contributions and saving about $11,000 in taxes for a net increase in cost of about $7,000. If you were to add on some kind of discretionary profit sharing plan on top of the 401k your tax savings could be even greater, and your retirement account even juicier.
Another way to put this is that for every $100,000 in profit that your business produces, $22,000 is paid in federal income taxes. Add on state and other taxes, and this $22,000 number is higher. By deferring as much of this profit as you can on a yearly basis, not only will you keep those dollars away from the prying eyes of the IRS, but you will keep that money for later use in retirement, assist your employees in attaining their own retirement goals, and pay much less in taxes annually.
If your business either has, or is looking into, a 401k or similar plan, contact us at the Moneywise Wealth Management office at (661) 847-1000 or email firstname.lastname@example.org We are experts in the field with years of experience in creating customized and unique retirement plans and platforms. We get to the heart of what makes your company unique, and we work to build a plan that is customized specifically for your demographics and goals.
*Disclosure* The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.