We often find that business owners, especially small business owners, do not realize they can set up their own retirement plan. This helps not only to save for the future but also to reduce taxes now.

I’m going to walk through an example and show the mechanics of various retirement plans. In this video, we will focus specifically on a Simplified Employee Pension better known as a SEP-IRA.

Let’s assume that after all expenses, your Net Income is $100,000.

There are two different tax calculations which a self-employed individual needs to consider:

Self-Employment Tax
Income Tax

The Self-Employment Tax is applied at a rate of 15.3% against Net Income.

The result is what it is and can not be reduced unless there are additional expenses.

The amount subject to Income Tax can be reduced, even after year-end, by contributions to various retirement plans. We mentioned the SEP-IRA above which is a lot like a Traditional IRA except for that it may allow for larger contributions and more flexibility on the contribution date.

A business owner can put away money into a plan up to the calculated limit or a maximum contribution limit, whichever is the smaller of the two.

The deadline for making a contribution is not until October 15th after year-end. For example, for the 1/1/2018 – 12/31/2018 calendar year, you would have until 10/15/2019 to make make a contribution. This allows you the business owner to review your finances, evaluate your cash flow and determine whether or not making a contribution after-the-fact would be beneficial or not.

For those that want to save for their future and also reduce their tax situation now, this may be a great option for you!

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