Retirement plans let business owners save for themselves and their employees with tax advantages. The IRS compares the options in Publication 560 and on its retirement plans for small businesses pages. Contribution limits change annually, so this guide focuses on how the plans work rather than dollar figures.

SEP IRA

A Simplified Employee Pension lets the employer contribute to IRAs for the owner and eligible employees.

  • Funded by employer contributions only, as a percentage of compensation
  • Employees: if you contribute for yourself, you must contribute the same percentage for eligible employees
  • Deadline: can generally be set up and funded up to the business's tax return due date, including extensions
  • Administration: minimal; no annual Form 5500

SEPs suit owners with no employees or with variable profits who want flexibility year to year.

SIMPLE IRA

A Savings Incentive Match Plan for Employees lets employees defer part of their pay, with a required employer contribution.

  • Funded by employee deferrals plus an employer match or non-elective contribution
  • Eligibility: generally for employers with 100 or fewer employees who do not maintain another plan
  • Set-up timing: generally must be established by October 1 to take effect for that year, with exceptions for new businesses
  • Administration: low

SIMPLE plans suit small teams who want employee deferrals without full 401(k) administration.

Solo 401(k)

A one-participant 401(k) covers a business owner, and their spouse, with no other eligible employees.

  • Funded by employee deferrals and employer profit-sharing contributions, which can allow higher total contributions at some income levels
  • Roth option may be available for deferrals
  • Administration: an annual Form 5500-EZ once plan assets exceed a threshold

Traditional 401(k)

For larger teams, a traditional or safe harbor 401(k) offers the most flexibility but requires more administration and testing.

Contributions in your books

Contributions for employees are business expenses. Contributions for a sole proprietor or partner are generally deducted on the personal return, not as a business expense. For S corporation owners, contributions are based on W-2 wages, which ties retirement planning to reasonable compensation. We post employee deferrals through payroll and keep employer contributions in their own accounts.

Choosing

The right plan depends on whether you have employees, how profits vary and how much you want to contribute. Our tax services can model contributions using your numbers; plan documents are provided by your plan custodian or administrator.

Bookkeeping for retirement plans

Record employee deferrals as payroll liabilities until deposited, record employer contributions as an expense, and keep plan deposit confirmations. Late deposits of employee deferrals can create problems with the Department of Labor.

Review the plan document annually.

Key terms

Definitions for terms used in this guide, from our small business glossary:

  • Assets: Assets are resources a business owns or controls that are expected to provide future economic benefit.
  • Liabilities: Liabilities are amounts a business owes to others, such as suppliers, lenders, employees and tax authorities.
  • Payroll Liabilities: Payroll liabilities are amounts a business owes from payroll, such as withheld taxes, employer taxes and benefit deductions, until they are paid.