Profit sharing plans are a type of retirement plan in which the company is the sole contributor. As a business owner, you can choose how much or how little to contribute to your profit sharing retirement plan each year. In fact, you don't have to contribute any money at all if you don't want to. This allows you some flexibility in case of a bad year. Contributions to the profit sharing plan are tax deductible too, all the way up to 25% of compensation. The employee gradually gains ownership over contributions made on his behalf to profit sharing plans.

In order for your employees to qualify for a profit sharing retirement plan, they must not belong to a union and must be permanent residents or legal aliens. To start a profit sharing plan a company must be a sole proprietorship, partnership, or limited liability corporation and must file before December 31 of that fiscal year.

Before deciding to start a deferred profit sharing plan you should decide the following:

1. How long employees will have to work for your company before they become eligible for the profit sharing pension plan.

2. Establish a contribution schedule. For example, a 0% contribution the first year and 20% each year after that.

3. Plan out eligibility requirements for your company profit sharing. These can be less restrictive than the government's requirements, but not more.

Action Steps

The best contacts and resources to help you get it done

Tips & Tactics

Helpful advice for making the most of this Guide

• Profit sharing plans for small businesses are a great way to attract new or valuable employees while still providing the flexibility needed to help a small business get by.