It’s no secret that running a small business can be challenging. With many small businesses, planning can fall through the cracks. When was the last time you reviewed your financial plan through the lens of your business?
While financial planning encompasses all areas of one’s financial life, today we’ll look at two areas where small business owners can start—Saving & Tax.
Saving: What to Know
- While there are many retirement vehicles for small business owners to choose from, we’ll focus on two options—SEP IRAs and Solo 401ks.
Why not an IRA or a Roth IRA?
- IRAs and Roth IRAs are 2 common retirement savings options. But what if you want to save more than the maximum annual limits? Consider the SEP IRA or Solo 401k.
- SEP IRAs – a Brief Overview
- With a SEP IRA, your contribution limit is 25% of your total compensation, or a maximum of $69,000 in 2024 (whichever is less.)
- This maximum SEP IRA contribution limit will increase to $70,000 in 2025.
- Contributions are due by the tax deadline (typically on or around April 15th), or if you file an extension, by that deadline (typically on or around October 15th.)
- From the IRS website, “any employer, including self-employed individuals can establish a SEP
- Solo 401k’s – a Brief Overview
- IRAs and Roth IRAs are 2 common retirement savings options. But what if you want to save more than the maximum annual limits? Consider the SEP IRA or Solo 401k.
- With a Solo 401k, you can contribute up to $23,000 in 2024 or $30,500 if you’re 50 or over as an employee contribution.
- In 2025, the employee contribution limits increase to $23,500 or $31,000 if you’re 50 or over.
- As an employer, you can contribute up to 25% of compensation, but not exceed $69,000/year for both employee and employer contributions in 2024 (increasing to $70,000 in 2025.)
- The precise amount you can contribute to a Solo 401(k) depends on not only your net income from self-employment but also your business entity. Consult a tax professional to determine the amount you can contribute.
- Solo 401ks may also allow you to take a loan from yourself.
- Anyone who is self-employed or owns a business with no employees other than a spouse can contribute to a Solo 401(k).
These are just two of many different savings options for small business owners. Reach out to us to find out which retirement vehicle makes most sense for you and your business.
Tax: What to Know
- Keep your personal and business financial lives separate.
- Be sure to thoroughly track business income, expenses, and records.
- In addition to federal and state income tax, you may need to pay social security, Medicare, and unemployment tax to name a few.
- If you are not a W2 employee, chances are you need to set aside income for taxes. Consult a tax professional to determine how much you should be paying.
- You may need to pay more than federal and state income taxes
- Keeping separate bank accounts for your business is essential in staying organized and maintaining separation.
- Your business structure may impact how much tax you pay.
- There are many different business structures, including sole proprietorships, partnerships (general or limited), limited liability companies, and corporations (C-corps or S-corps.)
- A few questions to ask—which business structure makes the most sense for you? Does your current business structure still make sense for your business?
- Look into whether you need to pay estimated taxes
Planning
- According to a Fidelity study last year, 75% of small business owners don’t know if they are saving enough for retirement.
- Balancing your business goals (including growth, hiring, and improving your profit margins, etc.) with your personal goals (retirement, sending your kids to college, buying a larger home) while maintaining cash flow?
In this article, we highlight saving and tax, but you should also consider other areas of planning—cash flow, insurance, and estate planning to name a few.
How do you bring these areas into balance? Let’s get the conversation started. Reach out to us today to discuss any questions you may have.
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing includes risks, including fluctuating prices and loss of principal. No strategy ensures success or protects against loss.
This commentary reflects the personal opinions, viewpoints, and analyses of the Moneco Advisors employees providing such comments and should not be regarded as a description of advisory services by Moneco Advisors or performance returns of any Moneco Advisors client. The views reflected in the commentary are subject to change at any time without notice.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.