In 2020 the SECURE Act 2.0 was passed with some critical impacts for freelance businesses with a solopreneur owner and those freelance businesses with employees.
Here are some key provisions that freelance business owners should be aware of regarding the SECURE 2.0 Act:
- The Act is intended to reduce the costs related to setting up and managing a self-employed retirement plan as well as those related to educating employees about their retirement plan options.
- Eligible employers with up to 50 employees may be able to claim a three-year start-up tax credit that equals 100% of administrative costs—up from 50%—that is capped annually at $5,000.
- As the operator of a small freelance business, you may also qualify for an additional credit of up to $1,000 per employee, which will generally be a percentage of the amount contributed by the employer on behalf of employees. The full additional credit is limited to employers with 50 or fewer workers and phases out for those with 51-100 employees.
- Roth options are available for SIMPLE & SEP IRAs through the SECURE 2.0 Act. This is in addition to the option of owning Roth versions of 401(k)sand 403(b)s, that employers can already offer workers which have different tax advantages than their traditional counterparts.
- The new law adds two kinds of workplace individual retirement accounts (IRAs) to the list of plans that can be funded on an optional Roth basis: Savings Incentive Match Plan for Employees (SIMPLE) IRAsand Simplified Employee Pension (SEP) IRAs. Contributions to these Roth accounts will be made after taxes and be included in your employee’s annual taxable income.
- Matching Roth contributions are now allowed. Before SECURE Act 2.0, matching contributions could only be made to traditional retirement accounts that are pre-tax. If you have employees, you can now give them the option of receiving matching and nonelective contributions to their Roth retirement account. Any Roth match will be taxable to the employee in the year it is made.
- Starting in tax year 2024, if your freelance business doesn’t sponsor a retirement plan, you will be able to offer a starter 401(k) plan that is easier and less expensive than a traditional 401(k) plan. This will generally require that all employees be enrolled in the plan by default at a deferral rate of 3% to 15% of compensation. The limit on annual contributions will equal the IRA contribution limit, and employers can’t make matching or nonelective contributions.
- As an alternative to the starter 401(k) plan, businesses can offer a starter safe harbor 403(b) plan that has similar guidelines.
- SIMPLE IRA employer contributions are also increased under the SECURE 2.0 Act. Starting in 2024, employers will be able to make additional nonelective contributions to each employee of the SIMPLE plan up to 10% of compensation or $5,000 (indexed), whichever is less.
In addition for employers with 25 or fewer employees, the annual deferral and catch-up contributions will increase by 10%. If you have 26-100 employees you can provide higher deferral limits only if the employer either provides a 4% matching contribution or a 3% employer contribution.
- If you or your employees are not contributing to an employer-sponsored plan because you are trying to pay down your student loans, keep in mind that in 2024, employers will be able to make matching contributions to an employee’s 401(k) plan, 403(b) plan or SIMPLE IRA when participants make payments on their student loans. As an employer you can contribute to your workers’ retirement plans even if the individuals aren’t making contributions.
- Starting in 2024, employers can choose to allow non-highly compensated employees to make Roth contributions to an emergency savings account that links to their individual retirement account. The contributions are treated as elective deferrals for purposes of retirement matching contributions.
- Businesses can automatically enroll employees into the accounts at no more than 3% of their salary, though workers can opt out. The participant’s contribution is capped at $2,500 unless employers set a lower limit, and employees must be allowed to make withdrawals at least once a month.
- If your freelance business has employees, you will need to automatically enroll eligible employees in newly established 401(k) or 403(b) plans beginning in 2025, starting with a minimum pretax contribution equal to 3% of their wages. Contributions will increase by 1% each year until the employee contributes at least 10%, but not exceeding 15%, of their earnings. Employees can opt out of the increased contributions at their discretion.
If your freelance business is less than three years old or has fewer than 10 employees, the automatic enrollment provision does not apply.
- Under the SECURE Act 2.0, part-time employees are eligible to participate in retirement plans sooner. In 2025, part-time employees aged 21 and older who work at least 500 hours in each of two consecutive 12-month periods will generally be eligible to participate in 401(k) plans. Working at least 1,000 hours per year will remain another way to gain eligibility. The new part-time coverage rules also extend to 403(b) plans.
Need Help Understanding How SECURE Act 2.0 Impacts Your Freelance Business? Ask Your Tax Professional
As a self-employed freelancer or small business owner, the SECURE Act 2.0 may have a big impact on the way you handle your retirement savings and related taxes as both an individual and a business owner, be sure to reach out to a tax professional if you need clarification on these impacts from your specific situation.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancer’s Union and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com — which also features a blog, how-to articles, and a comprehensive freelance tax guide.
Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available March 1 through April 18 and covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.