Employer contributions to a 401(k) plan affect both your payroll and your company's taxes. This article explains how contributions are processed, what tax benefits apply, and how to handle non-elective contributions and profit-sharing deductions.
If you offer an employer match or non-elective contributions (including safe harbor), we process them with each payroll as an expense separate from wages. We generally pull both employer and employee contributions at the same time, directly from your company's bank account on file.
Note: Profit-sharing contributions are the exception. We process these once a year, and we typically pull them from your account in a separate transaction.
Employer contributions get favorable tax treatment in a few ways:
Generally 100% tax deductible for employers, up to the annual corporate tax deduction limit on all employer contributions (25% of covered payroll)
Not included in the employee's gross income until distributed¹
Exempt from both the employer and employee portions of Federal Insurance Contributions Act (FICA) Medicare and Social Security, Federal Unemployment Tax Act (FUTA), and other payroll taxes
Able to grow tax-deferred over time, and possibly tax-free for qualified Roth distributions
Non-elective contributions need to be calculated from each employee's total annual compensation. We process non-elective contributions on a per-pay-period basis.
You may need to make true-up contributions in some cases. If any non-elective contributions were not made on compensation during the year (for example, on bonuses), or the non-elective contribution was added mid-year, you need to make true-up contributions to employees who did not get their full employer contribution amount.
Similar to profit-sharing contributions, true-up amounts may be deductible in the previous year, even though you make them after year-end. We allow true-ups due to plan changes or for correction purposes, but we do not support across-the-board true-ups of matching contributions.
Profit-sharing contributions you make after year-end but before your organization's tax return due date (plus any requested extension) are deductible on your prior year's tax return.
The Internal Revenue Service (IRS) allows you to make profit-sharing contributions after your tax return due date but before the end of the following year and deduct them on the next year's taxes. However, the plan document used by Gusto Retirement plans requires that you make profit-sharing contributions by the tax return due date.
How you deduct your profit-sharing expense depends on your company's accounting practices. Consider consulting a qualified tax advisor about how to properly deduct your profit-sharing expense.
¹ While Roth employer contributions are permitted, Gusto Retirement does not support these types of contributions at this time.
The information provided herein is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal, and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.