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Published December 08, 2022
A weekly look at issues facing Wyoming business owners and entrepreneurs from the Wyoming Small Business Development Center (SBDC) Network, a collection of business assistance programs at the University of Wyoming.
By Cindy Unger, business adviser, Wyoming SBDC Network
Small-business owners need to think about some kind of retirement savings for themselves and their employees. In this competitive employment environment, having a retirement plan for a business’s current or future employees might help attract and retain better help.
Some important considerations in choosing the best retirement plan for your situation are:
-- Do you currently have or anticipate having employees in the future?
-- Is it a priority that employees contribute to the retirement plan?
-- Is your priority higher contributions or ease of administration?
Below are some alternatives to consider:
-- Roth IRA. Even with no employees, a business owner can set up an individual Roth IRA. The primary eligibility requirement is that the participant has “earned income.” Earned income is earned by working for someone else who pays you or income earned by running your own business or farm. Any type of passive investment income resulting from securities, rental property or other assets is categorized as unearned income and cannot be contributed to a Roth IRA. Contribution limits for 2023 are $6,500 for individuals under age 50 and $7,500 for individuals over 50.
-- Payroll deduction IRA. If you are an employer but do not want to adopt a retirement plan, you can allow employees to contribute to their IRAs through payroll deductions. Employees decide how much and when to contribute to the IRAs. No employer contributions are required.
-- Simplified employee pensions (SEPs). Employers can set up SEP IRAs for themselves and each employee. The employer must contribute a uniform percentage of pay for each employee, and the owner is considered an “employee.” Employer contributions are limited to the lesser of 25 percent of pay or $66,000 in 2023. This plan is beneficial to cover the owner(s) of businesses with no employees. Advantages include the fact that employers are not required to make contributions every year, and startup and operating costs are low.
-- SIMPLE IRAs. These are available for employers with 100 or fewer employees. They require an employer/employee match. Employees can contribute up to $15,000 in 2023 via payroll deduction. Employers must either match the employees’ contributions dollar for dollar, up to 3 percent of their compensation, or make a fixed contribution of 2 percent of compensation for all eligible employees, even if employees choose not to contribute. This is easy to set up and maintain. Employees can decide how and where the money will be invested and retain the SIMPLE IRAs even when they change jobs.
-- 401(k) plans. Solo plans are possible. The 2023 contribution limit is $22,500. Employers are not required to match. Employees actually defer a portion of their salaries. These deferrals go into the 401(k) plans that are sponsored by the employers and are accounted for separately for each employee. Employees can choose to contribute either on a before-tax or after-tax (Roth) basis. Plans may or may not require employer contributions. The employer contribution may be a profit-sharing contribution.
There is a special rule for sole proprietors and single-member LLCs. They can contribute 25 percent of net self-employment income, which is net profit less half their self-employment tax and the plan contributions they made for themselves. The limit on compensation that can be used to factor in your contribution is $330,000 in 2023.
Although these alternatives are relatively simple, there are additional alternatives and regulations involved. Small-business owners should consult their tax professionals for additional information. And small-business owners can discuss their strategies and goals for each of these solutions with their Wyoming SBDC Network business advisers. Small-business owners can make an appointment today and start saving for their future.
The Wyoming SBDC Network offers no-cost advising and technical assistance to help Wyoming entrepreneurs think about, launch, grow, reinvent or exit their business. In 2021, the Wyoming SBDC Network helped Wyoming entrepreneurs start 80 new businesses; support 4,077 jobs; and bring a capital impact of $9.2 million to the state. The Wyoming SBDC Network is hosted by UW with state funds from the Wyoming Business Council and funded, in part, through a cooperative agreement with the U.S. Small Business Administration.
To ask a question, call 1-800-348-5194, email email@example.com, or write Dept. 3922, 1000 E. University Ave., Laramie, WY 82071-3922.