Business owners, the 2015 year has ended, but did you know you could still reduce your 2015 taxable income and save for retirement at the same time? Read below to learn more about the SEP-IRA and how it can benefit you and your business.
What is a SEP-IRA?
SEP-IRA stands for Simplified Employee Pension – Individual Retirement Account. A SEP-IRA allows employers a simple way to make deductible retirement contributions for themselves and their employees. Only the employer may make contributions to the plan. The plan is also discretionary so it allows the employer flexibility when deciding contribution amounts from year to year. You can set up a SEP plan for the tax year as late as the due date (including extensions) of the business income tax return for that year.
Who is eligible?
A SEP-IRA plan can be set up for a business, of any size, that has one or more employees. This includes sole proprietors, partnerships, S corporations, C corporations and non- profit organizations. Self-employed individuals with no employees are also eligible. Employees are not eligible to set up their own plan. If you are an employee of a company but have self-employment income from a side business you may set up a plan to contribute from the self-employment portion of your income. Individuals are allowed to have a SEP-IRA for self-employment income as well as a retirement plan with their employer and/or a traditional IRA and Roth IRA.
When can you contribute to the SEP-IRA?
The big advantage to participating in a SEP-IRA plan is the contribution deadline. The SEP-IRA contribution deadline is by the tax filing deadline, including extensions. For example, if you are a sole proprietor your contribution for the 2015 tax year must be made by April 15, 2016, however, if the return is extended the contribution deadline is October 15, 2016 or the date of filing. This gives you the opportunity to reduce your taxable income in the business well after the 2015 tax year has closed. The SEP-IRA plan requires that allocations are proportional to employees’ compensation. This means that everyone’s contribution is the same percentage of salary. It is important to stay in compliance with the plan guidelines, otherwise, the contribution may not be deductible.
How much of the contribution is deductible?
An employer is allowed to deduct up to 25% of the employees’ qualified compensation, not to exceed $53,000, in 2015. This means if you contribute $25,000 into an employee’s SEP-IRA and they have $100,000 in qualified compensation you can take the full $25,000 contribution as a business deduction. If you are self-employed, the IRS provides a special calculation to compute the allowable contribution and deduction. You may find detailed information regarding the self-employed contribution calculation in Publication 560 issued by the IRS.
The SEP-IRA is a convenient option for employers to contribute to retirement for their employees and for themselves. It is relatively easy to set up and has minimal maintenance fees. The ability to make contributions up until the tax filing deadline (including extensions) allows employers to reduce their tax liability after the year has closed.
This article is a general overview of the SEP-IRA plan. There is much more information on this specific plan as well as other retirement plan options for your business. Please feel free to contact your KMM advisor or this article’s author, Lyndsey Hardin, for more information.