VIEWPOINT: Preparing for Tax Season & Your Future

With tax season upon us, business owners are hyper-focused on making sure their filing is correct. While this is incredibly important, many business owners are missing out on an ideal opportunity to plan financially, for next year and beyond.

It might seem overwhelming to plan for the future while still actively working on the present, but by directing your focus into three key areas, you will be setting up yourself, your business, and your employees for success in the years to come.

Create a team & plan

Before you begin, it is important to know that any success that you and your business can hope to have in the future starts with creating a solid financial plan today. An ideal starting point is to connect with a wealth-management team that will help you map out, and subsequently monitor, your business going forward. 

We understand that when you’re running a business, planning for the future often feels less urgent than current issues, but it is truly the best thing you can do for yourself, your business, your employees, and even your family. Developing a comprehensive plan begins by reviewing your assets and liabilities while projecting both personal and business growth through the upcoming years. This is crucial to making sure that you have a firm understanding of your current financial picture. You can then run scenarios to see how variations may affect your planning moving forward. 

Determine how you’ll save

After your financial plan is created, the next step is to ensure that you and your employees are setting yourselves up for a strong financial future. As a small-business owner, it is important to understand that the current retirement-plan contribution limits for 2024 will allow you to contribute up to $69,000, or $76,500 if over 50 years of age. This is the lesser of your compensation, or up to $69,000. 

For employees in 2024, the maximum 401(k) contribution limit is $23,000, which is the same for 403(b) and 401(a) plans. Employees that are 50 or older may also make an additional $7,500 catch-up contribution. The contribution limit on SIMPLE IRAs is $16,000.

In an effort to make sure both you, the business owner, and the employees benefit, there is a large selection of 401(k) plan features to choose from. 

Some of these are: 

Safe harbor: The most popular type of 401(k) plan, it can help business owners maximize their annual contributions by automatically passing the ADP/ACP and top-heavy nondiscrimination tests that are required to guarantee that highly paid employees are not benefiting unfairly. However, in order to qualify for this plan, the business must contribute to one of the following:

- Matching contribution: Either a 100 percent match on the first 3 percent of deferred compensation plus a 50 percent match on deferrals between 3-5 percent or making a more generous match often equating to a 100 percent match on the first 4 percent of deferred compensation. 

- Nonelective contribution: 3 percent or more match of compensation regardless of whether or not the employee contributes. 

Roth 401(k): This plan type allows your employees to make salary deferrals to their retirement after taxes have already been taken out. This allows the employees to have tax-free growth as well as upon distribution.

Automatic enrollment: You, the business owner, have the power to automatically enroll your team members who do not opt to make a salary deferral on their own — essentially encouraging more participation which helps your business qualify as a Safe Harbor plan. 

Profit sharing: This allows the business to allocate a contribution to any plan participant, regardless of whether they make a pre-tax or Roth deferral. 

Discretionary match: The business can opt to match a percentage of either pre-tax or Roth deferrals (which is new in 2023) for its employee participants. 

Ensure lifelong financial security

Finally, while it’s not the most pleasant topic, a large part of planning for the future is deciding what happens to your assets when you’re no longer here. As you are going through the planning process, it’s the ideal moment to review your will and see if any changes need to be made. There are also ever-changing federal tax laws pertaining to the gifting of assets, as well as businesses to your chosen beneficiaries — either during your lifetime or through your estate; however, in the current political climate, these gifting limits may change. Therefore, it is important to ensure you periodically update your trust and estate plan, especially if you are considering completing a large transaction, such as transferring or selling your business in the future.

All in all, we know that tax season can be stressful, both for your personal and business finances, but it’s also the best time to implement a plan for the future. By connecting with a professional wealth-management team, you may have a small amount of upfront work, but you are able to hand off the heavy lifting of putting all the data together for a comprehensive financial plan, which can be continuously reviewed and updated throughout the years to come. As the famous saying goes — if you fail to plan, you plan to fail.                 

Tami Amici is VP, fiduciary tax services manager at Tompkins Financial Advisors, Central New York