Margaret, the president of her company came into my office one late November morning feeling great! “We had another good year and I was going to write holiday bonus checks for everyone. This year we’ll be giving out bonuses equal to 7% of our employees’ annual pay. Our folks work hard and it’s always gratifying to do that. However, I was wondering if you had any thoughts about dealing with this year’s company profits.”
“Well, you were right to reach out to me,” I said.
Margaret looked up, interested but cautious.
I leaned forward. “Giving out bonuses is wonderful, but there’s a way to do it that can be a win/win situation. You’ll avoid extra taxes, make a lasting impact on your employees’ futures, and put in a large tax deferred bonus into your own retirement account.
Margaret chuckled. “You’ll hear no pushback from me on that!”
“So here’s my present to you: Take 4% of the 7% bonus and put it into your employees’ retirement accounts as a profit-sharing contribution. That skips income taxes, bypasses FICA tax entirely, and your gift won’t add to their immediate taxable income. And that’s just the first win.
“The profit-sharing portion of the bonus will go in as a tax-deferred contribution, which will compound over-time. Your employees will be building something meaningful—more than just a holiday check that will evaporate as soon as the holiday bills come due. That’s the second win.
“And I just crunched the numbers. “Adding the 4% profit sharing contribution to your employees’ retirement accounts will allow you to put away another $40,000 in additional retirement savings. “That’s the third win:
Margaret’s shoulders relaxed and her smile returned. “So they’ll still receive a bonus, they’ll get extra money into their retirement account, and I get to put way another $40,000 on a tax deferred basis? What a great idea! David, you’ve saved my holidays!”
“And watching you get your smile back has made mine. Happy 2025!”
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