Are you a business owner who’s going to have to write a check to the IRS this year?
If you’re looking for a last minute tax deduction you may want to consider adopting a Simplified Employee Pension (SEP).
If you don’t already have a qualified plan, as a business owner you can establish a SEP up until your tax return due date, including extensions. SEPs are IRA accounts, but because the business is making the contributions, larger amounts are allowed than if an individual established an IRA.
Contributions to the SEP are made by the business and are tax deductible to the business. The business can contribute up to 25% of pay, not to exceed $53,000 (for 2015), for each eligible employee, including the business owner. Contributions are not treated as taxable income to the employee participants until they take a distribution from the SEP plan, usually at retirement.
You are not locked into making contributions every year. In fact, you decide each year whether, and how much, to contribute to the SEP plan.
Sole proprietors, partnerships, and corporations, including S corporations, can set up SEPs. The IRS provides the necessary documents to establish the plan (IRS Form 5305-SEP). You do not have to file any documents with the government, therefore, the cost to administer the plan is very low.
Who do you have to include and how much would you have to contribute?
You will have to cover any employee who:
- Is at least age 21,
- Has performed service for you in at least 3 of the last 5 years, and
- Has earned at least $550.00 in the current tax year.
Contribution Example:
| Salary | SEP Contribution | % of Salary Contribution | |
| Owner | $75,000 | $15,000 | 20% |
| Employee | $30,000 | $6,000 | 20% |
| Total | $105,000 | $21,000 | |
| % to Owner | 71.42% |
Tax Savings for the Business
| Total SEP Plan Contribution | $21,000 |
| Business Income Tax Savings (28%) | $5,880 |
| Net After Tax Cost of Plan | $15,120 |
| Contribution on behalf of Owner | $15,000 |
| Savings to the Business after Cost of Employees | $120 |
In other words, if you decide not to contribute to a SEP plan, there will be taxes due on the $21,000 totaling $5,880. With the SEP plan you receive $15,000 in your own account plus, after the cost of the employees, you have an additional $120 in savings. Of course the higher your tax bracket, the greater the savings.
Don’t ignore the SEP opportunity just because you may have to make a contribution for your employees. You may find that the tax savings you receive more than covers the cost of including your employees – and what better way to reward your employees than to make contributions toward their retirement with dollars that would otherwise be lost to taxes.
Don’t overlook the tax benefits of a SEP plan.
This information is not intended as tax or legal advice. For advice concerning your own situation, please consult with your appropriate professional advisor.
Distributions from SEP IRAs are taxed as ordinary income and, if taken prior to reaching age 59 ½ may be subject to an additional 10% premature distribution federal income tax penalty.
TC83855(0315)1