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.