Is My Business Ready to Offer Profit Sharing?

If you’re reading this, you already have some motivation to offer profit sharing (whether it’s your own desire or an employee requesting it).

Does that mean that you’re ready to provide profit sharing? It could! In this article, I’ll tell you more about the signs that you’re ready.

At CSI Accounting & Payroll, we’ve provided financial advisory services to small business owners for 60 years. We’ve been asked quite a bit about profit sharing, such as:

• What is profit sharing?
• How do I know if I’m ready to start profit sharing?
• How does CSI help with profit sharing?

What Profit Sharing Is

There are lots of misconceptions about profit sharing. It’s typically done through a 401(k), but it can also be done via a cash bonus. And while it’s typically declared at the end of each year (after profits are known), it can also be done quarterly… or done on a discretionary basis, meaning you can decide each year whether or not to contribute.

Despite the name, profit sharing doesn’t have to be tied directly to your company’s profits. It’s often based on a small percentage of each employee’s income. You can choose:

• Pro rata. The same percentage for all employees.
• Age-weighted. This refers to your employees’ actual ages as they approach retirement, not their longevity with your business.
• Different percentages for different groups. You can interpret this a number of ways, including salaried or hourly pay types, full-time or part-time workers, or by department. You just shouldn’t highly favor highly compensated employees, as this could fail IRS nondiscrimination testing.

Next, I’ll talk about the signs that you’re ready to start offering profit sharing.

Signs You’re Ready to Start Profit Sharing

First things first, when expanding your benefits, you need them to fit in your budget. If you’re not making much of a profit, then you’re not ready to offer profit sharing. There’s no real number that you need to hit, but the signs that you’re making enough include:

• You feel like you’re doing well, profit-wise.
• You can easily pay your bills, pay your taxes, and reinvest in your business.
• You have enough to take proper owner’s compensation.
• You have enough money left over to share.

If all of the above are true, then let’s keep going! Here are more signs that you’re ready to offer profit sharing:

• You want to attract and retain quality employees.
• Your plan already offers employer contributions. I see employer contributions as cake and profit sharing as icing. So, if you already offer employer contributions, adding a match or non-elective contribution is the next logical step.
• You have very high profits and want to minimize your tax liability. Please consult an accountant for professional tax strategy.
• You, the owner, want to maximize your own retirement savings. You can also use the 401(k) plan, and profit sharing can be a tax deferral.

If one or more of the above are true, then you may be ready to explore adding profit sharing to your plan. Next, let’s talk about where CSI comes into play.

How CSI Helps With Profit Sharing

CSI Accounting & Payroll provides… well… accounting and payroll, mostly. And profit sharing is typically handled through a 401(k) management company.

So, how can CSI help with providing profit sharing? Fortunately, we have amazing retirement plan partners that we’d love to refer you to.

Then, to ensure you’re fully taking advantage of the tax strategy portion of profit sharing, use our monthly accounting service to legally minimize your tax liability!

Get the Most Out of Profit Sharing!

Now that you know about the basics of profit sharing, the signs that you’re ready to start profit sharing, and how CSI can refer to 401(k) partners and help maximize profit sharing tax savings, are you ready to check out our monthly accounting services?

To see if we can be a good fit for your business, click the button below for a free consultation:

Not ready to talk? That’s okay! First, learn what your monthly accounting fee may look like by clicking the image below: