The biggest challenge for small businesses in the US right now.

Summary

• Small businesses in the USA hire 50% of the workforce, they experienced their worst moment in the pandemic.

• There are new challenges for small businesses: inflation and recession, but their biggest challenge is still hiring and keeping their staff.

• Did you know that SEP-IRA retirement accounts serve as a solution to attract and retain your staff?

Small businesses and their titanic work

Small businesses in the United States have really done a titanic job and have fought against all odds, since the beginning of the pandemic, always ratifying that entrepreneurial force and optimism that make up the American economy.

And really the name of small businesses falls short, when we consider that within this category more than 50% of the labor force of this country is employed.

But of course the challenge has not been easy, according to a study carried out by the  Proceedings of the National Academy of Sciences (PNAS), in the midst of a pandemic, 43% of businesses had temporarily closed and employment had fallen by 40%, being this:

“The biggest impact small businesses have had since the Great Depression of the 1930s”

Important factors for small businesses

So if you managed to go through this period as a small business owner, you can be considered a hero, but as always in the life of the entrepreneur the battle never ends and now includes factors such as:

• Inflation.
• An economic recession.
• Higher interest rates to finance.
• As well as still problems in the supply lines.

Before which we are sure that small business owners will be facing in their day to day and more when we remember that at the beginning of the pandemic, businesses of this type had cash to last for just two weeks and in an almost magical way. and supported by the aid and stimulus programs of the CARES Act (The Coronavirus Aid, Relief, and Economic Security Act) they achieved it.

The big challenge for small business owners

There is a great challenge that has remained present and worries 1 in 2 small business owners and that is that according to the National Federation of Independent Business (NFIB), they say they still have vacancies that they have not been able to fill.

This being a totally contradictory situation when many economists already point out that we are experiencing an economic recession, together with the highest inflation of the last 40 years, which would naturally cause, as in other times of financial stress, an increase in unemployment and a reduction in consumption. .

In particular there is a figure published by the NFIB, which is totally terrifying:

“89% of small business owners say no one qualified comes along to fill these vacancies”

So for small businesses the great priority is focused on two particular lines of action:

1.- How do I retain my human memory?

2.- What can I offer differently than other businesses so that they prefer my company?

Of course, being financial advisors and not human resources specialists, we can see that many small companies have an option in front of them, but unfortunately they do not know about it.

Taking into account that the owners of small businesses already know that they will have to raise their salaries to capture these new resources or they know that it will cost them more, according to the NFIB, 46% have said that they have increased their employees’ compensation .

A solution for small businesses

So there is an option that can serve as a solution for these small businesses and much more at this time when employees are not having the ability to save for their retirement in many cases since inflation eats away at their purchasing power.

Undoubtedly, many small businesses cannot offer retirement programs like those that large companies have called 401K plans, but there is an option under plans called SEP-IRAs.

For this reason, we precisely want to explain what SEP-IRAs are about and why they can be the great differentiating factor when retaining and hiring new resources for your company.

Let’s start by explaining what a SEP-IRA account is, the first three acronyms SEP stand for Simplified Pension Plan and the second part IRA, called an Individual Retirement Account.

What makes SEP-IRAs a solution for your staff?

They have a very different characteristic from the other Individual Retirement Accounts (IRA), they allow the company to make the contributions to the employees, while in the IRA accounts, as its name says, they are individual, the workers themselves are the ones who they make the contribution and not the employer.

As we mentioned before, if you tell your employees: “it is important that you contribute to your own retirement” many will say yes; but, the commitments of the day to day and the present moment will not allow many to take that first step.

If, on the contrary, it were you, as a small company, that gave a contribution for their retirement, and that they know that this money can be invested; also, that while it is growing in that retirement account they are not going to pay taxes, the vision is very different.

Tax advantage for small businesses

For the company this represents a very interesting tax advantage, because you will not only support your workers to build their financial independence; but the contributions you give reduce your tax base as a company and help you save on taxes. Likewise, your employees can deduct these contributions from their gross income. Contributions to the SEP-IRA are not subject to federal income taxes, Medicare or FUTA (unemployment taxes).

It allows you to place your small business at a level more comparable to that of a large company; In addition, for the year 2022, the individual retirement accounts IRA annually the worker could only contribute about $6,000 a year; while in a SEP-IRA the employer can contribute up to $61,000 or the equivalent of up to 25% of the worker’s compensation.

Also, if you have a business that does not go so well for some years, you could lower this percentage of contribution by the employer or, if it goes well for you, raise it. Remembering that in this type of retirement accounts only the employer can make contributions and the percentage you apply must be the same for all workers, being able to select a low or high percentage but the same for all.

A simplified version of a pension plan

As the name suggests, they are a simplified version of a much more complex pension plan, being quite simple to create and manage, for which you can consult a certified financial planner on the CFP Board page.

Of course, this money belongs immediately to the worker, but being for retirement, if you want to withdraw it before turning 59 and a half, a 10% penalty applies to the amount withdrawn and payment of taxes.

Many think that these types of employee retirement plans are for small businesses but they are great and the great reality is that they are ideal for companies with between 1 to 5 employees.

Of course, there are other interesting options such as the individual 401K plans for self-employed workers or the SIMPLE – IRA for small companies that want to have an account where both the employer and the employer give contributions or if you already have a larger company, the plans 401Ks are also an interesting option.

It is well worth your while to find out a little more about these types of retirement accounts and start differentiating your job offer from all the other small businesses that are competing for more than 10 million openings right now.

Alonso Rodríguez Segarra

Founder & CEO Advise Financial

advise-financial.com

Alonso is a “CERTIFIED FINANCIAL PLANNER™” who is dedicated to increasing the Financial Well-being of nurses, physicians and successful immigrants in Florida and Texas. With more than 20 years of experience in the world of finance, always working for the best interest of his clients, under fiduciary criteria.