Retirement plans for sole proprietors with full time W-2 employees
When a sole proprietor has W-2 employees (other than themselves or a spouse) who work more than 1,000 hours they are not eligible for an Individual 401k. Sole proprietors who have W-2 employees may be required to make contributions on behalf of their employees. Sole proprietors who have full time W-2 employees typically select a Small Business 401k, Simple IRA, SEP IRA or Defined Benefit Plan.
Sole proprietors with full time employees generally select from retirement plans that fall into 3 categories.
1) Retirement plans that are exclusively funded by the employer
SEP IRA - The employer makes a contribution for any eligible employees according to a percentage between 0 to 25% of compensation. The percentage is the same for employer and eligible employees.
Defined Benefit Plan - The employer makes the contributions according to a specific formula based on actuarial calculations. The maximum retirement income benefit is $230,000 in 2020.
2) Retirement plans that are employer and employee funded
SIMPLE IRA - Employees can make a voluntary contribution in 2020 up to $13,500 or $16,500 if age 50 or older and the employer makes a mandatory match according to 2 options.
Small Business 401k - Employees can make voluntary contributions in 2020 up to $19,500 or $26,000 if age 50 or older. The employer has the option of making a companymatch or a profit sharing contribution. An employer match and/or profit sharing contribution is not required.
3) Retirement plans that are exclusively employee funded
Small Business 401k - Employees can make voluntary contributions in 2020 of up to $19,500 or $26,000 if age 50 or older. An employer match is not required.