As a small business owner, one of the best ways you can retain great employees, aside from paying them awesome salaries, is by offering a 401(k) retirement plan. Employees can participate by contributing either a flat dollar amount or a percentage of their gross salary from each paycheck. Many employers match this contribution up to a certain amount as a perk, but the IRS does not require matching.
There is some work involved in getting 401(k) deductions right, so we designed a calculator specifically to help you figure out your employees’ take-home pay quickly and accurately.
All you have to do is enter a few details about their plan participation information, and the calculator will do the rest of the work for you.
As tax-deferred retirement accounts, 401(k) plans are beneficial to your employees because contributions are exempt from being taxed this year. Let’s look at a quick example of how this works.
Sally makes $5,000 a month. If we keep things simple and assume she is in the 20% federal tax bracket and pays no other taxes, her tax obligation would be $1,000.
But let’s say she decides to contribute 10% (or $500) of her monthly salary to her 401(k) account. Her taxable income now shrinks to $4,500, so her tax obligation also decreases from $1,000 to $900. That $500 she contributes monthly into her 401(k) account remains tax-free until she is eligible to withdraw it from her plan at age 59.5. (And adds up to nice retirement fund!)
Note that the maximum amount your employees can contribute to their 401(k) plan does vary each year. For 2020, it is $19,500.