Simplified Employee Pension (SEP) is a good way to save for financial freedom while saving on taxes. A SEP IRA allows an employer to put away money for both themselves and their employee(s). The SEP IRA is available for any size business. SEP is best for the business that has a cyclical nature where revenue is often unpredictable. It is more convenient for businesses with income unpredictability to choose when and how much to contribute on a year to year basis. The downside is the employer must contribute the same percentage he contributes for his or her self. Employers who have no other employees don’t have to worry about this issue.
SEP IRA Limit
The SEP IRA limit in 2014 is:
- Lesser of 100% of a participant compensation for the year or
- 25% of wages up to $52,000.
- 20% of net self-employed income after self-employment tax adjustment
- The maximum deduction is $52,000 for self-employed individuals.
The employer and not the employee
makes deductible contributions to the employees SEP IRA. No withholding from employees’ wages allowed.
SEP IRA Eligibility
An employee is eligible as long as the employee has reached:
- Age 21,
- Worked at least 3 of the immediate consecutive 5 years, and
-
Has wages of at least $550.
SEP IRA Deadline
The SEP IRA can be set up as late as the due date including extensions.
Whether or not you have employees, you wear two hats as the owner of your business. The first hat is the employer hat and the second one is the employee hat. Find below the advantages and disadvantages to you as the employer and the employee.
Employer Advantages
- Tax deductible contributions
- Flexible cost structure
- Minimal administrative tasks and expense
- The SEP IRA are beneficial to employers who need to wait till the last minute.
Employer Disadvantages
- Employer must contribute same percentage to all eligible employees. Same applies to self-employed business.
- The employer must make contributions for both part time and seasonal employees
- Employees have access to the funds as soon as it is deposited into their account
- Employees control investment
Employee Advantages
- Annual contributions and earnings are not currently taxed
- Funds can be withdrawn at any time
Employee Disadvantages
- Future benefits are not guaranteed
- Employers contribution may not be frequent
Whether or not you choose to go with a SEP IRA or 401K will depend on individual circumstances. In general, self-employed businesses with cyclical businesses and no employees will benefit most from this plan.
Go to part 1 of series 401K Simple IRA SEP IRA Payroll Deduction IRA Profit Sharing Plan