Profit Sharing Plans Basics

Look into qualified profit sharing plans for your employees and enjoy tax deductions

Company profit sharing plans are a great way to reward or give incentives to your current employees as well as attract new talent. These plans aren’t for every business, though. It is important that you gather as much information as possible ahead of time and become well versed in the profit sharing plan's basics before making any decisions that will affect your employee’s pay and maybe their retirement plans as well.

When you are thinking about offering employee profit sharing plans, the first step is to educate yourself on the basics of the idea. Here are some things to consider:

1. Weigh your options when it comes to beginning a company profit sharing program.

2. Pick the right one for your company and the state of the economy.

3. Ensure you are getting the most out of the plan by following all of the necessary tax rules to get the deductions.

Decide if company profit sharing is right for your business

Choosing whether to start employee profit sharing plans at your company is a big decision. As with most business decisions, there are positives and negatives. For example, a profit sharing plan is a great way to reward employees for their hard work and often leads to higher productivity. On the other hand, while you are rewarding those employees who are hard workers, you are also rewarding those workers who do enough work to get by and make others pick up their slack. It is important to weigh both sides of the coin before making your decision.

Sample profit sharing plans of different types

Once you have decided to take the plunge and institute a company profit sharing plan, the next step is to decide which one is the best one for your needs. There are a few options to choose from. Some of the most common are a 401k profit sharing plan where it is the employees' retirement plan as well, or something like a cash profit sharing plan, in which money is paid out in either bonus checks or added pay, if the company is doing well.

Research tax facts regarding profit sharing plans for small businesses

The government wants to encourage company owners to begin a profit sharing retirement plan for small businesses, so there are tax deductions available. One of the most important things you have to do in order to get these tax deductions is to fill out a Form 5500, which itemizes how much money went into every employee profit sharing plans.
U.S. Department of Labor, to get your questions answered. Fidelity has a helpful FAQ page that will explain all of the relevant tax information in layman’s terms.

• As a way to encourage new employees to stay with the company, set up a plan where they have to work for the company for a minimum amount of time before being able to take advantage of the company's profit sharing plan.

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