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  • Writer's pictureSamantha Diggs

Tax Deductions for Self-Employed Business Owners

Updated: Apr 26, 2023

It’s no secret that most people want to save on their tax bill. Like many, business owners are asking what they can do to keep their wallet from taking a major hit. Fortunately, there are benefits to having a retirement plan that go beyond ensuring the financial future of your employers. Do you want to pay less come tax time? Learn about tax deductions for self-employed business owners and other retirement plan related saving opportunities.

Retirement Saving Tax Deductions for Self-Employed Business Owners

For employers, one of the many advantages of retirement plans is that you can deduct retirement plan contributions as an adjustment to income. Depending on your plan type, how much you can contribute—and thus deduct—will be dependent on your IRS qualified plan type. There are two types of qualified plans: defined contribution plans and defined benefit plans. Among their differences, both have their own distinct contribution limits set forth by the Internal Revenue Service (IRS).

  • Defined contribution: In a defined contribution plan, contributions cannot exceed either $66,000 or 100% of the participant’s compensation, depending on whichever is less. Note that if these contributions are going into a solo 401(k) account, you can make contributions both as the employee and employer.

  • Defined benefit: Tax deductions for self-employed business owners stop at the contribution limit of $265,000 for defined benefit plans. However, if 100% of a participant’s average compensation for their highest three consecutive calendar years is less than the limit, then that number should be used instead.

Take Advantage of Tax Credit

Tax deductions for self-employed individuals are not the only way business owners can get help on taxes. If you own a new small business and are in the process of setting up a retirement plan, you could be eligible for tax credit towards your retirement plan startup costs. This tax credit gives employers the opportunity to claim 50% of their retirement costs for a total of $500 per year. These expenses include setting up a plan and the administration cost of your plan which can be claimed for the first three years of its creation. You are eligible for this credit if:

  • You had 100 or fewer employees who received at least $5,000 in compensation from you the preceding year.

  • You had one or more plan participants who were non-highly compensated employees

  • In the three years preceding your initial eligibility, a substantial amount of your employees weren’t those who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that involved you, or a predecessor of either.

Experience the Full Potential of Your Retirement Plan

Being aware of the tax deductions for self-employed business owners and other opportunities like tax credits is a great way to minimize the damage of your tax bill. At RPCSI, we guide you through how to optimize a retirement plan that will work in your best interest. Contact RPCSI to get started today.


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