401(k) tax credits are intended to help offset the costs associated with offering a 401(k) plan to your employees. They’re also known as the Credit for Small Employer Pension Plan Startup Costs and the Small Employer Auto-Enrollment Credit.
If you offer a Guideline 401(k) through Gusto, Gusto offers to calculate your company’s 401(k) tax credit for free, right from your Gusto admin account. We’ll guide you through the questions that can determine if you are eligible and fill out the form with your company’s Guideline data. We’ll also provide instructions you can send your tax preparer to include the form in your income tax return filing.
401(k) tax credits may offset a portion of income tax that you owe for a given tax year. This means instead of a cash refund, you will see a reduction in owed tax. If you will not owe any income tax this year, then the credit can be carried over for up to 20 years to be used against future income taxes.
If you have questions, we recommend consulting your tax preparer to advise based on your business’s specific situation.
Gusto currently offers the free calculation service for customers who use our preferred 401(k) partner Guideline. If you use another provider, consult your tax professional to claim the credits.
Your business may be eligible to claim credits if:
If you offer a Guideline 401(k) through Gusto, follow these steps to see if you qualify and start Form 8881:
IRS Form 8881 should be provided to your tax preparer for them to include in the filing of your business’s income tax return. Additional changes to your business’s income tax return may be required as a result of form 8881. Click here for the IRS’s step-by-step instructions to file this form.
How much can I benefit from the 401(k) tax credit?
The amount of the tax credit varies by employer. It is a portion of the costs incurred from offering a retirement benefit to employees up to $5,000 per company for plan costs, an additional $500 credit for plans including an auto-enrollment feature (which all Guideline plans include), and the potential for additional credits for companies who contribute to employees’ plans (including matching contributions).
How do I receive the money for the 401(k) tax credit?
The 401(k) tax credit is used to reduce the amount you pay in taxes for a given year. This credit will not result in a cash refund for a current tax year.
If you do not owe any income tax this year, you can still benefit by either carrying back your credit one year or carrying over your credit amount to future years, for a maximum of 20 years. For example, if you do not owe taxes this year but then owe taxes next year, you can put the unused amount towards reducing next year's income tax.
How does this credit affect my deductions?
Any costs claimed through the 401(k) tax credit, including plan administration costs and additional education expenses, may not also be deducted as business expenses. If you are claiming this credit, make sure that any claimed expenses are excluded from your deductions.