What is the startup tax credit?
The IRS offers tax credits to help small businesses offset the costs of starting a retirement plan. Launch a SIMPLE IRA or SEP IRA and receive up to $5,000 annually for three years to cover setup and administrative costs, plus additional credits for auto-enrollment and employer contributions.
How tax credits work
Eligible employers can claim up to $5,000 per year for three years to offset plan setup and administrative costs. For businesses with 50 or fewer employees, this covers 100% of eligible costs. Businesses with 51-100 employees receive 50% of eligible costs.
- Auto-enrollment bonusIf you make the plan automatic (employees are enrolled unless they opt out), you get an extra $500 credit for 3 years.
- Employer Contribution CreditYou can receive tax credits for employer matching or non-elective contributions you make to employees' accounts:
- Years 1-2: 100% of contributions (up to $1,000 per employee)
- Year 3: 75% of contributions (up to $750 per employee)
- Year 4: 50% of contributions (up to $500 per employee)
- Year 5: 25% of contributions (up to $250 per employee)
Together, these credits can significantly reduce, or even eliminate your retirement plan costs for the first few years. A business with 10 employees making typical contributions could receive over $50,000 in total tax credits.
Curious how much you could claim? Try our calculator and see exactly how much you could save.
Estimate your tax credit
Disclosure*
The SIMPLE IRA tax credit calculator is intended to estimate the average tax credit for your business. Please note, it does not constitute tax or legal advice.
Benefits of tax credits
Lowers your tax bill directly
Tax credits reduce the amount of taxes you owe, dollar for dollar, helping you keep more money in your business.
Reduce plan setup cost
The credit offsets fees for establishing and administering a retirement plan, making it easier to get started.
Attract and Retain employees
Offering retirement benefits shows commitment to your team, improving engagement, morale, and long-term loyalty.
How to claim tax credit
Complete IRS Form 8881Form 8881 is specifically designed for the Credit for Small Employer Pension Plan Startup Costs. You’ll use it to calculate your credit based on your eligible expenses and employee count.
Report the credit on your business return
1.Sole proprietors and single-member LLCs include the credit on Schedule 3 of Form 1040 under “General Business Credit.”2.Partnerships file Form 1065 and attach Form 8881, then pass the credit to partners on their Schedule K-1.3.S-corporations file Form 1120-S and attach Form 8881, passing the credit through to shareholders.4.C-corporations file Form 1120 and report the credit directly as part of the General Business Credit.Keep your records readyMaintain invoices for setup and admin fees, employee eligibility details, and the plan adoption date. The IRS may request documentation to confirm your credit.
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Frequently asked questions
You may qualify if:
- You had 100 or fewer employees who earned at least $5,000 in the past year,
- At least one employee is not a highly paid owner/manager, and
- Your employees weren't covered under another plan you offered in the last 3 years.
Yes. This is for businesses starting a new retirement plan. Existing plans that already covered your employees don't qualify. However, adding auto-enrollment to an existing plan can earn you a separate $500 credit.
If you add an eligible automatic contribution arrangement (auto-enrollment) to your plan, you can claim a tax credit of $500 per year for a 3-year period beginning with the first year you include the feature.
Yes. In addition to startup costs, small employers can also claim a credit for the contributions they make to eligible employees' retirement accounts.
- For businesses with 1-50 employees, the credit covers up to $1,000 per employee:
- 100% of contributions in years 1-2
- 75% in year 3
- 50% in year 4
- 25% in year 5
- For businesses with 51-100 employees, the credit phases down — reduced by 2% for each employee over 50.
Important: This credit doesn't apply to contributions made for employees earning more than $100,000 (as of 2023).
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