As a contractor on a prevailing wage project, don’t miss out on a potential opportunity to reap significant tax benefits! By electing to contribute prevailing wages to a “bona fide benefit plan” such as a retirement plan, you may be able to substantially lower your direct labor costs while still fulfilling your prevailing wage obligations. Here’s how prevailing wages can work to your advantage when contributed into your company’s retirement plan.
Benefit 1 – Payroll Tax Savings
For prevailing wages (PW) paid into a retirement plan rather than paid in cash as wages, you may be able to avoid payroll taxes – which can translate into considerable company savings. For example:
Benefit 2 – “Offset” Plan Contributions
Prevailing wage contributions may also be used to offset company contributions – such as profit sharing contributions and required safe harbor contributions – potentially reducing your company’s total annual contibution costs. This benefit is magnified under a “cross-tested” new comparability plan which may enable you to maximize profit sharing contributions to yourself and key personnel. For example:
In this example, the profit sharing contribution is 20% to the owner and 5% to staff. Because contributions have already been made to prevailing wage employees, the owner saved $6,500 in profit sharing contributions.
Benefit 3 – “Boost” 401(k) Plan Test Results
Prevailing wage contributions can be counted toward satisfying the special 401(k) compliance tests that can limit the amount of salary deferrals you and your top-paid employees contribute. Using these contributions in your 401(k) plan may allow you to defer more and avoid refunds.
There are guidelines in the Davis-Bacon Act that must be followed when using prevailing wage contributions in your retirement plan. With careful plan design, you may be able to recognize immediate savings on payroll taxes, reduce total plan contribution costs, and avoid limitations or refunds of your 401(k) salary deferral contributions.
Please contact us to learn how we can help you take advantage of this opportunity to use your prevailing wage contributions more effectively.
About the Author
Martin McCann is president of McCann Asset Management and is a practicing financial advisor in Fresno, California. He focuses on retirement plans and wealth management.
Martin can be reached at 559-400-6520 or Martin@McCannAM.com.
Visit the McCann Asset Management web site at www.McCannAM.com