Pre-Tax 401(k) Offers Up-Front Tax Deductions for You and Employees

Pre-tax contributions reduce taxable income dollar-for-dollar, which can lower current income taxes for your employee participants. For some employees, this may be one of their larger tax deductions. By choosing to contribute to a 401(k) plan, a portion of an employee’s salary that would have gone to the government in taxes instead gets invested for their future.
As an employer, you can choose to:
  • Match a portion of employee contributions;
  • Make a company contribution as a percentage of employee pay;
  • Make a profit sharing contribution tied to company performance; or
  • Not offer a company contribution
Company matching contributions may encourage your employees to save more so they can get the maximum match. And profit sharing contributions give employees a vested interest in helping your company perform well. If you decide to make company contributions, your business gets an up-front income tax deduction, too. It’s important to note that payment of Social Security taxes is required on all 401(k) contributions.

Game Plan

Work with your tax professional to structure your plan’s pre-tax contributions for maximum flexibility and effectiveness.
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