401(K) SETUP + TAXES
Top Tax Advantages of Starting a 401(k)
A 401(k) isn’t just a powerful way to save for retirement—it’s also packed with tax benefits that can help business owners and employees keep more of their hard-earned money. From tax deductions to credits, a well-structured 401(k) plan can make a big difference at tax time. Here’s how:
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Keep More, Save More
Contributing to a 401(k) allows business owners and employees to lower their taxable income today while building wealth for the future. In 2025, individuals can contribute up to $23,500 tax-deferred ($31,000 for those 50 and older). For business owners, this can mean thousands in tax savings each year. Let’s take an example:
Personally, you might pay thousands less in taxes in the current year, and you made a meaningful $23,500 contribution for your golden years. What’s more, if you offer a match in your 401(k) plan, the amount put toward retirement is even greater!
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Lower Tax Brackets
Business owners with no employees can take advantage of a Solo 401(k), allowing contributions of up to $70,000 ($77,500 for those 50 and older). These contributions reduce taxable income, potentially dropping the saver into a lower tax bracket.
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Generous Tax Credits for Small Businesses
Businesses with fewer than 100 employees can qualify for tax credits to offset 401(k) setup and administration costs. Companies with 1-50 employees may receive credits covering 100% of eligible expenses, up to $5,000 per year for the first three years. An additional $500 credit is available annually for businesses that implement automatic enrollment, bringing total potential savings to $16,500.
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Employer Contributions: A Win-Win
Employer contributions, whether through matching or profit sharing, are tax-deductible, reducing a company’s taxable income. Small businesses can also qualify for additional tax credits of up to $1,000 per eligible employee for the first five years.
While employer match is discretionary, most small and medium-sized businesses with steady revenue elect to match for three key reasons:
1. Attract & Retain Talent: Offering a match makes your company more competitive, helping you stand out to top talent who want to grow their retirement funds.
2. Tax Benefits Galore: Businesses get to deduct their contributions, lowering taxable income, while employees enjoy tax-deferred growth on their match—win-win!
3. Free Money: Employer matching contributions are essentially free money to employees that boosts employee savings without them lifting a finger—who doesn’t love that?
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Tax-Free Growth with Roth 401(k) Contributions
For those who anticipate higher tax rates in the future, a Roth 401(k) offers a smart alternative. Employees can contribute post-tax dollars, and both the contributions and earnings can be withdrawn tax-free in retirement. While employer contributions are always tax-deferred, adding a Roth option gives employees more flexibility in their retirement planning.
Setting up a 401(k) isn’t just an investment in employees’ futures—it’s a strategic financial move that can reduce tax burdens today. With the right plan, businesses and employees alike can save more, pay less in taxes, and build a stronger financial foundation.
Find the Right Plan for Your Business or Nonprofit
NESA simplifies retirement planning by partnering with financial advisors, CPAs, recordkeepers, and industry professionals to create tailored workplace retirement solutions. From small businesses to mid-sized companies, nonprofits, and self-employed individuals, we help organizations provide meaningful retirement benefits—ensuring employees and business owners alike can save with confidence and peace of mind.