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March 14, 2024 •HoganTaylor
Are you a small business owner eager to secure your financial future while also providing for your employees? If so, navigating the realm of retirement savings options might seem daunting. However, fear not – there are accessible solutions tailored to the needs of small enterprises. One such option worth considering is the Simplified Employee Pension (SEP) plan, offering simplicity in administration and flexibility in contributions.
Before we delve into the intricacies of SEP plans, here's a timely reminder: You still have an opportunity to capitalize on tax savings for the 2023 tax year by establishing and contributing to a SEP. Even if you've extended your 2023 Form 1040 to October 15, 2024, you can establish a SEP and make an initial contribution, deductible on your 2023 return.
Setting up a SEP couldn't be easier, thanks to the IRS model SEP, Form 5305-SEP. This form satisfies SEP requirements without the need for filing with the IRS. As the employer, you'll enjoy a current income tax deduction for contributions made on behalf of your employees. While your employees won't be taxed when contributions are made, they will be taxed upon distribution, typically during retirement. Depending on your business's needs, you can opt for an individually designed SEP instead of the model SEP.
The maximum deductible contribution to a SEP-IRA – excluding from income – is the lesser of 25% of compensation or $69,000 for 2024 (up from $66,000 for 2023) per employee. For business owners without a W-2 from the business, such as unincorporated sole proprietors, the contribution calculation slightly differs. Importantly, contributions to employees' SEP-IRAs aren't limited by the deduction ceiling applicable to an individual's own contribution to a regular IRA.
Although minimal, there are requirements you’ll have to meet to be eligible to establish and make contributions to an SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of highly compensated employees. However, unlike traditional retirement plans, SEPs alleviate burdensome administrative tasks. Detailed record-keeping isn't required, nor are annual reports filed with the IRS. Recordkeeping responsibilities can be entrusted to a trustee of the SEP-IRA, typically a bank or mutual fund.
While SEPs offer simplicity and tax advantages, they may not suit every small business's needs. Consider reaching out for tailored advice on SEP plans or other retirement saving avenues. We're here to guide you through the intricacies of retirement planning and help you make informed decisions for your financial future.
For businesses with 100 or fewer employees, SIMPLE plans present another viable option. These plans, featuring a SIMPLE IRA for each eligible employee, offer matching contributions based on employee elections. Additionally, a simple 401(k) plan mirrors the features of a SIMPLE plan without the complexity of nondiscrimination rules.
In 2024, SIMPLE deferrals are capped at $16,000 (up from $15,500 for 2023), with an additional $3,500 catch-up contributions permitted for employees aged 50 and older.
Navigating retirement savings options as a small business owner need not be overwhelming. With the right knowledge and guidance, you can establish a secure financial future for yourself and your employees. Whether opting for a SEP plan or exploring alternative avenues, prioritize planning and seek professional advice to maximize your retirement savings potential.
If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Tax practice, please email Tony Otto, Tax Practice Lead, at jotto@hogantaylor.com.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.