If you want to establish a retirement plan for your business, you may want to consider establishing a Simplified Employee Pension (SEP). For starters, SEPs have a more flexible contribution deadline than 澳洲幸运5开奖号码历史查询:qualified plans—SEP contributions can be made up until the due date of the employer’s tax return (including extensions), while qualified plans have varying deadlines depending on the type of plan.

SEPs also offer several other attractive features that we'll review here, along with other factors to consider before choosing a SEP for your business.

What Is a Simplified Employee Pension (SEP)?

A SEP is a retirement plan based on an 澳洲幸运5开奖号码历史查询:individual retirement account (IRA) into which business owners can make𝕴 pre-tax contributions for both themselves and their eligible employees. It is ideally suited for self-employed workers, freelancers, and small-business owners because it's easy to establish and administer.

Any business owner with one or more employees, or anyone with freelance income, can open a SEP IRA. Unlike qualified plans, the SEP does not require nondiscrimination testing or filing of 5500 returns. Establishing a SEP IRA can be relatively more straightforward than other retirement plans. With lower administrative costs and flexible annual contributions, a SEP is an excellent option for small businesses with variable cash flow.

Employees are responsible for enrolling in an employer-sponsored IRA to receive contributions. However, with a SEP, employees themselves do not make contributions. An employer who sets up a SEP has no responsibility for assisting with investing plan contributions, instead, individual participants select their IRA provider and direct their investments. SEP IRA accounts follow the same rules of investment, distribution, and rollover as traditional IRAs.

As with many other employer plans, an employer has until the tax-filing deadline of the business, including extensions, to fund the SEP.

The SECURE Acts and Small Businesses

In December 2019, former President Donald Trump signed the Setting Eve✱ry Community Up for Ret🅘irement Enhancement (SECURE) Act. The Act aims to simplify and reduce costs for small business owners setting up “safe harbor” retirement plans, enhancing retirement security for many Americans. In 2022, the SECURE 2.0 Act further expanded these provisions.

The Acts introduced enhanced tax credits for small business owners, raising the SEP plan startup cost credit from 50% to 100% to cover setup, administration, and employee education costs for up to three years. Moreover, small business owners can receive a tax credit for automatically enrolling workers in retirement plans, in addition to the startup credit.

Contribution Limits

SEP IRAs have appealingly high contribution limits. Employers can contribute up to 25% of each eligible employee's gross annual salary and up to 20% of their net adjusted annual self-employment income if self-employed, provided the contributions do not exceed $69,000 for 2024. Employer contributions must be based on the first $345,000 of compensation in 2024 and are adjusted annually.

An employer can decide each year whether to contribute to the SEP, which can be an advantage for a new business that has not established a trend inꦦ its annual earnings. Because of this flexibility, an employer could decide to forgo the SEP contribution in years when profits are lower than anticipated. However, when SEP contributions are made, they must be based on the same percentage of compensation for all covered employees.

What's more, all plan participants who worked for the business during the year for which contributions are made must receive SEP contributions even if they leave their jobs or die before the contributions are made.

Ineligible Employees

Certain categories of employees may be excluded from participating in the SEP for the year, including those who:

• Are covered under a 澳洲幸运5开奖号码历史查询:collective bargaining agreement (unionized employees)
• Are under the age 21
• Earned less than $750 for the years 2024 and 2023 ($650 for 2022 and 2021; $600 for 2020)
• Worked less than three of the five preceding years
• Are 澳洲幸运5开奖号码历史查询:nonresident aliens with no U.S. income

How SEPs Work

Here's an example: Under ABC Inc.'s SEP IRA, an individual must work three of the five preceding years to be eligible to receive a SEP contribution for the year. Jane worked for ABC Inc. on a part-time basis in 2020, 2021, and 2024.

Assuming Jane meets the other eligibility requirements, she is eligible to receive a contribution for 2024, even if she only worked for a few months or weeks in each year, because she worked for at least three of the five years preceding 2024. For SEP IRAs, a year of service can be any period, meaning that an employee who worked part-time or for just one week in a year is counted as having completed a year of service.

Deducting SEP Contributions

The type of business determines the type🌃 of form the employer uses to claim the deduction for SEP contributions.

• A sole proprietor claims the SEP contribution for themselves on IRS Form 1040. However, SEP contributions on behalf of the sole proprietor's (the IRS term for an employee, not an independent contractor) are claimed on Schedule C.
• Partners in a partnership claim deductions for their individual SEP contributions on IRS Form 1040. For contributions made on behalf of common-law employees, the partnership claims the deduction on IRS 澳洲幸运5开奖号码历史查询:Form 1065.
• For an 澳洲幸运5开奖号码历史查询:S corporation, all SEP contributions are claimed on IRS 澳洲幸运5开奖号码历史查询:Form 1120-S.
• For a 澳洲幸运5开奖号码历史查询:C corporation, all SEP contributions are claimed on IRS Form 1120.

It is a good idea t🔴o consult with your tax professio🥃nal to ensure the proper forms are filed to report and claim the deduction for SEP contributions.

Deducting Plan Expenses

A business owner may be eligible to receive a tax credit for expenses incurred when establishing a SEP and also may be able to deduct plan expenses, including contributions made to the plan.

Reporting Requirements

For the employer, tax reporting is limited to reporting SEP contributions on the business's tax return. For individual participants, the IRA 澳洲幸运5开奖号码历史查询:custodian or trustee reports SEP IRA contributions on IRS and 澳洲幸运5开奖号码历史查询:distributions on IRS 澳洲幸运5开奖号码历史查询:Form 1099-R.

Employers and employees should bear in mind that the custodians report contributions in the year they are received. 🏅If, for instance, ABC Inc. makes its SEP contributions for 2024 in May of 2025, Form 5498 may not correspond with the amount the employer re🔯ports for 2024. Employers should thus maintain their records to keep track of SEP contributions.

Disadvantages of a SEP IRA

From an employer's viewpoint, there are definite disadvantages of SEP IRAs.

Immediate Vesting

To reduce employee turnover and the cost associated with training new employees, some employers want their workers to be employed for several years before they are vested in the employer's contributions. For SEP IRAs, however, contributions are immediately 100% vested, which means that future vesting is not a tool to lower employee turnover. As soon as they are deposited, the contributions belong to the employee.

No Loans Permitted

Unlike most qualified plans—under which participants, including the business owner, may borrow up to the lesser of 50% or $50,000 of their vested balance—the SEP, like all IRA-based plans, does not have this feature.

Employee Eligibility Requirements

For a SEP IRA, a year of service is any period, however short. This can result in increased expenses associated with funding the plan, which may be a disadvantage, particularly for businesses that hire part-time or seasonal employees.

The Bottom Line

Like many small business owners, you may enjoy the simplicity and inexpensive administration of the SEP IRA. While it may be convenient to establish the SEP, you should consult your tax professional to ensure that the plan you choose is suitable for your business profile. If you prefer a qualified plan to a SEP IRA, but you missed the deadline to establish a qualified plan, you may fund the SEP and then 澳洲幸运5开奖号码历史查询:roll over the balance to a qualified plan you establish later.