Does your small business need a retirement account that offers simplicity in setup and flexibility in funding?
Simplified Employee Pension Plans (SEPs) allow unusual flexibility for businesses that operate on cash-basis accounting and generally can only recognize expenses for tax purposes when they are actually paid. Provided the business obtains an extension for its returns, funding for a SEP can be deferred until Oct. 15 following the close of a tax year and still be included as an expense on that year’s tax return.
The SEP is particularly useful in tax planning because it allows small businesses who don’t do their taxes until after the first of the year to wait in figuring out how much they want to take as an expense and contribute for employees in that particular year.
A SEP offers other benefits for small businesses, particularly those operated by sole proprietors.
For one, you are not locked into making contributions every year. In good years, you can max out your contribution, but in leaner times, you can choose a lower amount or no contribution at all. This is particularly advantageous for businesses where cash flow is an issue.
A SEP also has higher contribution limits than many other retirement plans. A business can contribute as much as 25 percent of an employee’s pay, up to $52,000 for 2014 and $53,000 for 2015. Contributions to the SEP are tax-deductible.
Employers must make contributions equally for all employees — the same percentage of a person’s pay. Unlike a 401(k), only businesses can make contributions to the retirement account; employees cannot.
Generally, SEP administrative costs are low and the plan is easy to set up and administer.
For some businesses, a SEP could make sense, providing flexibility while still offering the benefits of funding tax-advantaged retirement accounts. You should consult your accountant if you think this option might be best for you.
Jeff Talley is a partner with LBMC Tax, Audit & Advisory, the largest regional accounting and financial services family of companies based in Tennessee. Contact Jeff at firstname.lastname@example.org or 615-309-2286.