Profit Sharing Plan for Self – Employed Individuals

Profit sharing is an incentive plan that distributes a portion of an organization's profits to its employees. The company contributes a portion of its pre-tax profits to a pool that will be distributed among eligible employees. The amount distributed to each employee may be weighted by the employee's base salary so that employees with higher base salaries receive a slightly higher amount of the shared pool of profits. Generally this is done on an annual basis.

A plan may qualify under federal laws and regulations for tax deductibility even if the employer does not have current accumulated profits, provided there is a definite formula for allocating plan contributions among participants and their beneficiaries for a fixed period, upon the attainment of a stated age, or upon an event such as the participant's retirement, disability, death or severance of employment. Calculations of profit vary by employer and accounting practices.