Providing Benefits when Self-Employed

Face it, for most people, Social Security isn't enough. As a business owner, you have the power to make more choices when it comes to your retirement savings. There are a variety of different options for the self-employed, each with different contribution limits, employer and employee requirements and deadlines, but here's a quick overview of some of the more popular plans.

A Savings Incentive Match Plan (SIMPLE) IRA is open to the self-employed as well as business owners with 100 or fewer employees who earned $5,000 or more on payroll (as of 2019). Employers make a matching contribution of up to 3% of each participant's compensation or a flat contribution of 2% of each eligible employee's compensation. If you have employees, consider a SIMPLE plan. These have no administrative costs and employer match is limited to those employees who choose to make contributions. Also, a SIMPLE plan is the least expensive way to put a significant amount away each year for yourself. But size matters. If you have more than 20 employees, you may want to implement a 401(k). Fewer than 20 employees and the annual administrative costs of a 401(k) become burdensome. For this reason, if you have only a few employees, a SIMPLE plans have relatively low administrative costs, but they also don't permit employees to defer as much as a 401(k) does.

A Solo 401(k)/Self-Employed 401(k) is only open to the self-employed and business owners with no employees other than a spouse. You can cap your contributions as an employee and then have your business contribute up to 20 percent of your total earnings. You don't have to contribute a set amount each year so you can give less in a tough year and more in a good year. If you make a contribution to the account as an employer, the contribution is tax deductible as a business expense. The only con is that a solo 401(k) is more complicated than an IRA. You'll need a plan administrator to set it up. While it isn't incredibly expensive, it will cost money to set up and maintain. Once there is $250,000 in the account, you have to report the benefits annually using form 5500.

A Defined Benefit Plan is also open to the self-employed and is best for owners who are looking to save a lot of money and who consistently have money to save. You can save more than $1000,000 each year for retirement. And, because it is different from other retirement plans, you can combine it with a Solo 401(k) or SEP IRA to save more than $150,000 each year. Defined benefit plan contributions can be written off as business expenses, too. Unfortunately, costs are high. An actuary will determine minimum funding levels each year, and you have to make the minimum funding. Payouts are defined when the plan is set up, and you can withdraw only a set amount per year during retirement, unless you roll the money into another retirement account. If you have employees, you must offer it to them as well. (Which is why such plans have become less popular for large businesses but may be a good option for a solo business.)

The implementation of the Affordable Care Act has changed health insurance. Small business owners have historically had a much harder time providing themselves and their employees with insurance due to rising health insurance costs; meanwhile bigger businesses have remained largely unaffected due to the leverage buying large group health plans gives them. This problem has gotten more severe in the past decade.

The Affordable Care Act mandates that employers with 50 or more full-time employees must provide health insurance. But it also allows for generous tax credits to smaller businesses with 25 or fewer full-time employees. It's too complicated to condense, but a decent summary of what the Affordable Care Act means for small businesses can be found at: Affordable Health Care for Small Businesses

Disability Insurance: If you're the sole proprietor of a small business, the likelihood is excellent that without you, there wouldn't be a business. But the good news is that disability insurance is usually very inexpensive if you're in good health. State laws vary, and if sole proprietorships, LLCs and partnerships are allowed to participate in state disablity plan, this might be your best and least expensive option. If not, comparison shop, both online, through an agent or through association and trade groups. If you can gain access to a group plan, your costs will be substantially lower.