Is Profit Sharing Right for Your Business? -

Is Profit Sharing Right for Your Business?

If you're looking for a way to give your employees a bigger stake in the company, fund their retirement plans or regulate year-end bonuses, a profit-sharing program might be the solution for you.

Giving employees a larger chunk of your company’s bottom line might sound risky, but it often gives employees a boost in motivation. A recent study conducted by Babcox Research found that 23% of automotive repair shop owners offer their employees some type of “pension” plan and 15% offer profit sharing.

Read on to discover the ins and outs of profit sharing.

How It Works

Generally, there are two types of profit-sharing plans. The first consists of giving employees monthly or yearly bonuses. For example, let’s say that your business adopts an end-of-year profit-sharing plan in which you’ll split 15% of gross profits among employees at the end of the year. This would likely be given in the form of a check, much like a regular bonus check. You could also add a monthly profit-sharing bonus to employees’ base salary, much like a sales commission. Whatever bonus employees receive will count toward their taxable income.

The second profit-sharing method for small businesses to adopt is a type of employee retirement plan, which you can set up through your bank. Basically, you decide upon a fixed yearly amount to contribute to your employees’ account, and unlike other money purchasing plans, you have the option not to contribute if, for example, your business ends up in the red one year.

Through 2010, you may contribute the lesser of 25% of compensation or $49,000. These numbers will be subject to cost-of-living adjustments for later years.* As an added bonus to your employees, they won’t be taxed on the money until they withdraw it.

The Benefits

As your employees are key contributors to your business, it’s wise to reward them when profits are high. This makes employees feel appreciated and gives them an incentive to stick around. Profit sharing may even make them work harder. While your employees likely care about the health of your business, they’ll care even more if it translates into bigger paychecks or ­savings.

Dave Christopher, owner of ­Christopher’s Car Care in Tallmadge, OH, has had a bonus plan set up for his technicians for years. The shop doesn’t have much turnover and Christopher believes having a bonus plan in place helps keep his employees happy, which leads to higher employee productivity and increased job ­satisfaction.

“We don’t have a profit-sharing plan, but they do get bonuses based on how much work we do,” comments Christopher. “The more work we do, the more I pay them. The extra money is added to their first paycheck of the month.”

Profit-sharing plans are also fiscally attractive to you, the employer. Not only does profit sharing allow you to base bonuses on whether or not the money is there to give, it allows you flexibility when considering employee salary.

For example, let’s say that you’ve had the same office manager for 15 years and she has reached the upper tier of her salary range. A profit-sharing plan allows you to give her an incentive to stick around, even when you can no longer significantly raise her salary.

The Drawbacks

Rewarding your employees as a team unarguably produces many positive results, but also some drawbacks. Imagine profit sharing at a repair shop where all the employees, technicians and front office workers would receive a percentage of the shop’s profit each month and then split the money equally. Consider the technician with the most experience and training, and the technician who has been in the automotive repair field for only a year and is still working on getting his ASE certifications. Would it be fair for them to each take home the same profit-sharing bonus at the end of the month?

The profit-sharing plan in this ­example may cause resentment if some technicians feel they deserve a larger percentage due to their skill level, or if they feel certain technicians are not doing their fair share in the ­service bays.

Also, profit sharing can be risky if you’re making it your employees’ sole retirement plan. Many employees will have greater security with a traditional 401k that rewards them for their years with the company, regardless of its ­financial health. ­Employees who stick with a business during the lean times likely deserve a reward, not a shrinking retirement contribution. So unless your business is averaging more profitable years than not, a profit-sharing plan may not seem like a great ­incentive for your ­employees to stick around.

If you think a profit-sharing plan is right for you, talk to your accountant or the account manager at your bank. They will help you choose a plan the fits your budget and set up employee eligibility. As an added bonus, your contributions to profit-sharing retirement plans are tax deductible, so you’ll not only be rewarding your ­employees, but yourself as well.  

Adapted by Tim Fritz from information provided by the National Federation of Independent Businesses.

*Numbers courtesy of the IRS

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