If you’re looking to defer taxes on business or self-employment income (think Schedule C) and save for retirement, a Simplified Employee Pension (SEP) may be right for you. So, what is a SEP?
SEPs are intended as an alternative to “qualified” retirement plans (401k, 403b), particularly for small businesses. SEPs are relatively easy to set up and administer and you, as the employer, have complete discretion deciding whether to make annual contributions. Annual contributions made to you and your employees’ SEP accounts are deductible from your income, thus lowering current year taxes. Tax isn’t paid on these contributions until funds are withdrawn by the employee. The maximum contribution an employer can make to an employee’s SEP account in 2019 is the lesser of 25% of compensation or $56,000. Employees are not allowed to contribute funds to their SEP account.
You have until April 15th, 2020 to fund a SEP to save on 2019 taxes.
Business owners should be aware that contributions cannot discriminate in favor of highly compensated employees. Therefore, for businesses with a larger work-force, the SEP may not be the right retirement plan.
The ease with which a SEP can be created and administered, as well as the flexibility of contributions, make the SEP a very attractive way to defer taxes for business owner.