Individuals who are self-employed or own small businesses are subject to different rules and regulations when it comes to filing taxes. There are a number of options available to the self-employed and small business owners that aren’t available to others, and it’s important to be aware of all your options so that you can save the most money possible.
What is a SEP Plan?
An Individual Retirement Account (IRA) is a common plan used by Americans to save for retirement. There is a variation of the IRA, specifically for self-employed individuals and small business owners, called the Simplified Employee Pension Individual Retirement Arrangement (SEP IRA), which is an alternative to the traditional account-type. If you’re a small business owner or are self-employed, SEP plans are great retirement-saving options for you and your employees.
SEP Plan Benefits
If you’re self-employed, SEP plans are especially useful. Due to the fact that there are practically no costs or paperwork involved in setting up and maintaining a SEP, they’re an obvious choice for many. They’re readily available, as many financial firms offer the plans and they involve a wide variety of investment options. In 2014, individuals are allowed to contribute a maximum of $52,000 to their SEP, which is significantly more than what’s allowed in a traditional IRA.
Another benefit of SEPs is the ability to retroactively make tax deductions on your SEP contributions. Up until your tax return filing date (including extensions), you’re allowed to deduct any contributions made to your SEP.
Example: Jennifer, a freelance writer, is allowed to contribute $20,000 to her SEP based on her earnings last year (SEP contribution limits are between 20-25% of your net income). Jennifer creates a SEP with a local mutual fund company, and contributes $20,000 to it. As long as her contribution is made to the account by April 15th, when she files her taxes, she can take a $20,000 tax deduction on that return. If she can’t make the contribution by the deadline, she’s able to request an automatic filing extension, which gives her until October 15th to make the deductible contribution and file her taxes.
Check back next week to learn about how SEP plans can benefit small business owners!