According to the US Department of Labor, Under a simplified employee pension plan (SEP), an employer contributes directly to traditional individual retirement accounts (SEP-IRAs) for all employees (including the employer). SEPs are primarily used for self-employed individuals and members of small companies. A SEP allows for a contribution of up to 25% of each employee’s pay” up to a maximum of $52,000 into the person’s IRA each year.

Because the owner is not an employee with pay, the self-employed person can tax defer a set percentage of the company profits. A SEP can also be used by a person who has a job that has retirement benefits and who is also self-employed to defer taxes and save more for retirement.

What makes a SEP retirement plan valuable to small business is the lower paperwork burden compared to a 401(k) or 403(b) retirement account. The contributions follow the same basic tax rules as a 401(k): Contributions are not taxed when made, but the individual pays taxes on the money when it is withdrawn during retirement. Self-employed proprietorships without any employees can also get SEP retirement benefits.

The only records needed are the individual tax return 1040 with a Schedule C for self-employed income showing the SEP deduction from profits going into the SEP and the SEP account records verifying that the money was actually put into the SEP….(read more)

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