Does your business offer a retirement plan? Whether you’ve recently started a business or have been operating one for some time, setting up a retirement plan can be beneficial to both you and your employees. Besides providing tax incentives to defer income and save for retirement, retirement plans can help you reward and retain employees. Employer contributions are tax deductible, within certain limits.

SEP Plans

A Simplified Employee Pension (SEP) plan is relatively easy and inexpensive to set up and administer. You have complete discretion in determining whether or not to make annual contributions. To set up a SEP plan, you establish SEP individual retirement accounts (IRAs) for yourself and your employees. Qualifying contributions are tax deductible and not included in the employees’ current income. Taxes are deferred until money is withdrawn from the plan.

The maximum amount of your contribution for each employee is the lesser of 25% of annual compensation or $61,000, and no more than $305,000 of compensation may be considered (for 2022). There is a special computation for figuring the maximum contribution to a self-employed individual’s own SEP account. Additionally, contributions may not discriminate in favor of highly compensated employees.

Solo 401(k) Plans

A solo 401(k) plan may be a suitable option if you work alone or employ only your spouse. The chief advantage of a solo 401(k) plan is that it allows you to save as both the employee and the employer. As an employee, you may defer the first $20,500 of your compensation (or $27,000 if you’re age 50 or older). As the employer, you may also make a profit sharing contribution (subject to tax law limits). The combination of all contributions — including deferrals, profit sharing, and any others — may not exceed the lesser of (1) 100% of your compensation or (2) $61,000 ($67,500 if you’re age 50 or older). Contribution limits are adjusted annually for inflation.

SIMPLE IRAs

Like a SEP, a SIMPLE IRA plan entails setting up IRAs for yourself and each participating employee. You and your employees can elect to defer compensation to the plan (no more than $14,000 in 2022; $17,000 if age 50 or older). Additionally, employers must make an annual contribution by either (1) matching employee contributions up to 3% of pay (a lower 1% match is allowed in certain years) or (2) contributing 2% of pay for each employee who’s eligible to contribute, even if the employee chooses not to contribute.

A SIMPLE plan generally isn’t an option if you have another retirement plan or more than 100 employees.

Defined Benefit Plans

The chief advantage of a defined benefit plan is the high deduction ceiling, which allows owners to rapidly build up their retirement benefits. For 2022, deductible contributions may allow for an annual benefit that will, when the participant reaches age 65, equal the lesser of $230,000 per year or 100% of the participant’s average compensation for his or her three highest consecutive years of active plan participation.

The disadvantages of this type of plan include the funding and administrative requirements. Complicated actuarial formulas must be used to calculate the contributions to be made each year.

Many owners of small businesses would love to see a family member take over their business. If you have children, grandchildren, nieces, or nephews that you think might be interested in running the business in the future, you can help lay the groundwork for that potential transfer of ownership in several ways. Use the following strategies and tips to encourage the next generation to become part of the family business.

See Who Is Interested

One or more of your children may already have shown some interest in the family business and asked about its operations. It’s important to encourage that interest. Talk about the company’s history and your vision for its future. Share the excitement you experience as a business owner.

Over time, you can teach an interested child more about the business’s operations. Consider putting the child to work doing various tasks around the business on weekends and over school holidays.

Education Is Key

Over the years, the child’s interest in the business may wane or it may become more intense. If the child (or children) continue to express an interest in working for the family business, you might want to bring up future education plans. You can suggest that the child should consider obtaining a degree that would be beneficial in running all or part of the family business. For example, a degree in engineering could be a huge asset if the family business is involved in property development, construction, or design/build. A degree in accounting or finance can be helpful for businesses of all types. In addition, a degree in a related field would give your family member credibility when it comes to interacting with clients, bankers, and employees.

Insist on Outside Experience

Promoting a family member to a leadership position within the family business when that person has little experience can be a recipe for trouble. It can cause discord among employees, especially those who have worked hard with the expectation that they could move up in the ranks. Additionally, it can undermine the family member’s credibility in the eyes of clients and other business owners.

It often makes more sense and can be hugely helpful to have the family member obtain a post-college job outside the family business. Working in a different company in a similar industry to yours can give your family member a level of experience, confidence, and credibility that would not be obtainable by simply transitioning to the family firm. The skill set established through working elsewhere may help propel your family business in a new, more growth-oriented direction. Family business experts suggest that a child expected to take the reins of a family business should spend at least five years working elsewhere before joining the family firm.

When Multiple Children Are Involved

What happens when more than one family member is interested in becoming part of the business? Encourage them to follow the areas of the business that interest them most. With the appropriate education and experience working for other firms, they may be ready to run their own areas of the business when they rejoin the family firm. This is when their talents can develop and shine.

Bring in Outside Experts

The input of outside professionals who are skilled in different business areas, such as operations, finance, manufacturing, logistics, or marketing can be invaluable to the upcoming generation of family members joining the business. Mentors can guide and serve as a sounding board for the ideas of the child or children working for the family business.

Consider Staying on as an Advisor

You could consider making yourself available as an advisor to the incoming new generation of family members. Whether the arrangement is formal or informal, it should not be open-ended. Determine how long you will offer your services. The goal is to ensure that the new generation of leaders in the family business will be able to run the business independently.

Successfully transitioning a family business to the next generation takes time and planning. For planning assistance, consult an experienced financial professional.

Perhaps the number one action you can take to support the financial health of your small business is to stay on top of accounting. Make sure you’re aware of most small businesses’ accounting challenges and learn how to overcome them. We’ll tell you how here!

Banking

You’ve been banking for years, and you know how to manage the task. However, when you own a business, banking isn’t like managing personal checking and savings accounts. Unfortunately, many small business owners use their personal funds to pay for business expenses, especially when first starting out. Even small costs add up over time. This “cross contamination” of spending between personal and business accounts can lead to costly mistakes, not to mention headaches for your accounting team. Keep personal expenses, and business expenses separate all the time. Have dedicated bank accounts and credit cards only used for one or the other. If you need to track down an expenditure, you only need to look in one place.

Budget

When bank accounts are separated, budgeting becomes exponentially easier. You can even use an accounting software program to help you keep up with money coming and going to and from your business. However, recognize that simply entering information into a software program is not the end of the work when balancing a budget. Thinking that is true ends up being the downfall of many small businesses. Budgeting for a business means forecasting to ensure that unexpected expenses can be covered, managing inventory, taxes, and more. A shift in any direction can throw off any budget. That’s why many small businesses opt to outsource their accounting. The known upfront expense of doing so can far offset costly budgeting errors down the road.

Unexpected expenses

As mentioned above, you must consider the unexpected as part of your budget. Additional (new) taxes, payment delays from customers, rising costs of materials and supplies, new employee training, etc., are all possibilities. A qualified accountant is aware of these unexpected expenses and others that your business could face and knows how to prepare you for them. Awareness of what could financially happen in business is crucial to long-term profitability.

Payroll

While unexpected expenses are likely the most daunting for a small business, payroll is almost always the most significant. Payroll entails more than what you pay employees. New employee classification, if incorrect, could cost you a bundle in penalties. Other payroll-related accounting challenges are pay accuracy, proper tax filing, compliance, and paid time off tracking.

Unless you’re an HR professional, and chances are you’re not if you’re the business owner, consider recruiting a qualified accountant to help you manage payroll. It will save you headaches in the short term and money in the long term.

Taxes

A conversation about accounting and small business isn’t complete without discussing taxes. The tax struggle can be daunting, from filing to making sure you pay enough but that you don’t overpay. A significant challenge regarding taxes is merely keeping up with the ever-changing tax laws. A qualified accountant or CPA will be up-to-date on new regulations and guidelines so that you don’t have to be.

Overcoming accounting challenges like these is easy with a qualified accounting team on your side. Consider outsourcing your accounting needs so that your focus remains where it should – on running your business your way.

Contact our accounting professionals now for help managing your small business finances.