SEP IRA Contribution
If you are self-employed, there is a retirement plan designed specifically for you! A SEP IRA allows you to put away a lot of tax-deferred money toward your retirement. Independent contractors, sole proprietors, S and C corporations, partnerships and LLCs, as well as small companies can all use the SEP to shelter retirement savings. If you are self-employed, you do not have wages. Instead you have net profits from your business venture. Self-employed individuals can make a SEP IRA contribution of 20% of net profits up to $44,000 annually. Net profits for a SEP plan are calculated by taking the net self-employment income and subtracting one-half of the self-employment taxes. The resulting net-net self-employment income is then multiplied by 20% to arrive at the SEP IRA contribution amount. You have until your final tax filing deadline, including extensions, to contribute to your SEP for last year, but you do have to fund your SEP before you file your tax return. A Simplified Employee Pension Plan, commonly known as a SEP, is really a special kind of Traditional IRA plan structured to benefit the self-employed individual and small businesses. The rules of the SEP plan outline how funding takes place and sets the SEP IRA contribution limit. For the small business, the employer makes the decision on what the compensation will be, between 0% and 25%. The compensation amount is the same for all eligible employees, so a 20% contribution to one employee’s account means every eligible employee must also receive a 20% contribution. SEP IRA regulations allow for great flexibility on contributions. The employer will make the determination of the percentage and is not locked in to either amount of frequency for the SEP IRA contribution. The employer can decide on the amount annually, or even choose no contribution at all. Many employers will base this percentage decision on the net profit of the business or as a reflection of current economic conditions and their impact on the business. An employee is defined as 21 years or older, having worked for the employer for three of the past five years, and received a minimum of $550 in compensation. A SEP IRA allows for deferral of a significant portion of income into retirement investments where the money can grow tax-free. You can make the SEP IRA contribution for the previous year up until the final tax filing deadline, including extensions. A SEP plan for a small business allows the employees to make a bigger contribution thanks to the higher SEP IRA contribution limit, and many employees participate since contributions are taken from pre-tax income. The SEP IRA contribution cap is a generous $49,000 or 25% of income, whichever is less. There are many benefits to the SEP, including low administration costs and simple set-up, but perhaps the greatest advantage is the opportunity to accumulate tax-deferred retirement savings rapidly, thanks to the high allowable SEP IRA contribution.