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Last-Minute Tax Savings for Small Business Owners: Simplified Employee Pension (SEP) IRA

Last-Minute Tax Savings for Small Business Owners: Simplified Employee Pension (SEP) IRA

October 8, 2024

As October 15th approaches, many small business owners who filed tax extensions may feel like they’re running out of time and options to reduce their tax liability. However, if you think there’s nothing left to do before filing your 2023 taxes, think again! There’s still one powerful strategy you can use, and it can save you money on taxes while also helping you plan for retirement. We’re talking about a Simplified Employee Pension (SEP) IRA.

What is a SEP IRA?

A SEP IRA is a retirement plan specifically designed for business owners, whether you’re a sole proprietor, have a spouse in the business, or run a larger company with employees. What makes this plan stand out is that it allows you to reduce your taxable income by contributing a portion of your net earnings into your SEP IRA—up until the day you file your federal tax return (October 15 for extensions).

Unlike personal tax strategies that need to be completed by December 31st, business owners have until their tax-filing deadline to take advantage of a SEP IRA. This flexibility provides a great last-minute opportunity to lower your tax bill.

How Does a SEP IRA Work?

Here’s the beauty of the SEP IRA: You can contribute up to 25% of your net income, with a maximum contribution limit of $66,000 in 2023. For example, if your tax return shows you owe $100,000, and your accountant confirms that you can contribute 15% of your income to a SEP IRA, you’ll lower your tax liability by $15,000. That’s money that stays with you, growing tax-deferred until retirement.

This contribution not only lowers your tax bill but also goes directly into your retirement fund, giving you a double benefit. You save on taxes now while building a future nest egg.

Why Aren’t More Accountants Recommending This?

Many small business owners are unaware of this option, and for some reason, many accountants don’t often suggest it. But in our experience, the SEP IRA is one of the most powerful and easy-to-implement tax-saving tools for small business owners. It’s simple to set up, has minimal paperwork, and gives you flexibility when it comes to making contributions.

Easy to Set Up and Manage

Setting up a SEP IRA is incredibly straightforward. You can establish it through a financial institution like a brokerage firm or your bank. There’s no complicated paperwork—just a simple IRS form called Form 5305-SEP. Once the account is set up, you can start making contributions.

Unlike a 401(k) plan, there are no ongoing filing requirements or top-heavy tests to worry about. Plus, the contributions are completely discretionary. This means if you have a good year, you can contribute. If you don’t, there’s no obligation to make a contribution.

SEP IRA: Best for Small or Solo Business Owners

The SEP IRA is an excellent option if you’re a small business owner with no employees or just a spouse in the business. If you have employees, the SEP IRA can get expensive because you must contribute the same percentage for each eligible employee as you do for yourself. And employees are immediately 100% vested in the funds you contribute. Unlike a 401(k), where funds can vest over time, your employees can take the full amount and leave at any time.

If you’re looking for a tax-advantaged plan that prioritizes your retirement savings, while not requiring significant contributions to employees, a SEP IRA is the way to go.

Important Considerations for SEP IRA Contributions

While SEP IRAs are relatively simple, there are a few important points to keep in mind:

  • Contributions must be made by October 15th (if you’ve filed an extension).
  • The contribution limit is 25% of net income, capped at $66,000 for 2023.
  • If you’re self-employed, the calculation is a bit more complex as you need to subtract one-half of your self-employment tax from your net income before calculating your contribution.
  • Contributions can be made even after age 72, unlike traditional IRAs, where you are required to start taking minimum distributions.

Don’t Wait – Act Now!

If you’re a small business owner scrambling to find ways to reduce your tax bill before the deadline, a SEP IRA could be the solution you’re looking for. Not only will it help reduce your current tax liability, but it will also allow you to put away money for your retirement—tax-deferred.

If you’re unsure how to get started or need guidance, consult with your accountant or give us a call. We can help walk you through the process and ensure you make the most of this tax-saving opportunity before the October 15th deadline.

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