A profit sharing plan offers a strong incentive for employees to be invested in their work and in the success of the company. It can be structured as a retirement plan or as quarterly or annual bonuses for example. For small business, a well thought out profit sharing plan can also boost productivity and lead to increased profits. While you might think paying more in the end increases your staffing costs, fact is implementing a profit sharing plan at the right time and in the right manner can be a win-win situation. But when does profit sharing make sense and what are some good strategies to employ?
Profit sharing may not be the best fit for every small business. However, a business with a dedicated existing workforce is a good candidate for a profit sharing plan because there is a strong likelihood that motivation and results can be boosted. Another factor to consider is whether your business is profitable, and whether you expect it to continue to be profitable in the coming years. Typical numbers range anywhere from 10 to 25 percent – what you choose should balance the incentive for greater performance with your goals.
When determining your profit sharing plan, here are some factors to take into account:
- Type of plan: The two primary forms of profit sharing are contributions to a retirement account or bonuses paid out at regular intervals. Companies with older workforces may gravitate toward a plan the focuses on preparing employees for stability in retirement, while those with younger employees might prefer a bonus-based system.
- Business goals: Your plan should align with the goals and values of your business. Avoid encouraging profit-seeking at the expense of customer satisfaction, for example.
- The basics: There are three very basic things that need to be determined: who has the opportunity to participate in profit sharing, how much each participant will receive and when the funds will be disbursed.
For small businesses, the prospect of having a profit sharing plan can be very exciting, but it can also be intimidating. In addition to all of the details of the plan, there’s the whole matter of implementing the plan and ensuring you’re approaching it responsibly from a tax standpoint. This is where Accounting 360 Solutions can be of considerable help. To learn more about how we can help your business with this, please get in touch with us today.
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