What does the self-employed $100,000 rule mean? The SBA has given guidance and clarification, and Arista Wealth Management is here to guide you through the complexities.
Hello, welcome to Arista Advice. Hope you're well. Question of the week is: Paul, what does the self-employed $100,000 rule mean?
The SBA has given some guidance and direction from the beginning. They say "No, the exclusion of compensation in excess of $100,000 annually applies only to cash compensation not to non-cash benefits, including 3 things:"
Number 1: Employer contributions to defined benefit or defined contribution retirement plans.
Number 2: Payment for the provision of employee benefits consisting of group healthcare coverage, including insurance premiums, and three payment of state and local taxes assessed on compensation of employees.
Number one is really important. It talks about defined contribution and defined benefit plans. It goes back to the four buckets that we've been talking about for many, many years.
The first bucket is deferral. That's money that comes out of the employee and the employer's pay check through a W-2.
Bucket two is a safe harbor match 3%, 4%, 5% some companies match 7% or 8%.
Bucket 3 is the profit sharing, and 4th bucket is a defined benefit cash balance plan that the Small Business Administration in Department of Treasury has referenced with question 7.
Remember to always be maximizing your tax deductions and maximizing ways to lower your tax bill and to get an operating tax deduction and funding these 4 buckets. We've talked about this for years, and now through the PPP business owners can maximize these 4 buckets with guidance from the Paycheck Protection Program.