Advantages of Profit Sharing Plans
The contribution does not impact the amount you can put into you 401k. The profit sharing contribution is a separate amount that is based on discretionary amounts the employer wants to put in the plan for the benefit of all the fulltime employees. It is allocated based on a percentage of salary.
As a business owner, aside from keeping your employees happy within the company and their loyalty working for years to come.
When an employer contributes to a profit-sharing plan to the participating employees, those employer contributions are not currently included in the employees’ taxable income. Employees will not pay income tax on the money contributed to their plan accounts as long as those funds remain in the plan. Similar to a 401k plan, those funds held in a profit-sharing plan grow on a tax-deferred basis until withdrawn.
Employer Tax Deduction of a Profit Sharing Plan
As a business owner or employer that maintains a profit sharing plan and also participating in it, there are tax deductible benefits to the company. As an employer, your contributions to the profit sharing plan are generally tax deductible on the business’s federal income tax return for the year in which you make them.
The annual maximum tax-deductible contribution limit that business owners / employers are allowed to make cannot exceed 25% of the total compensation of all employees covered under the plan. Any amount of money in excess of the specified limits are not tax deductible, and is also subject to a 10% federal penalty. Regulations may change year to year and calculating the maximum tax-deductible contribution. If you would like more information on limits please visit the IRS.gov site.