A Simplified Employee Pension Plan Can Result in Significant 2015 Tax Savings
Some business owners may not be willing or able to commit funds immediately to a retirement plan due to business uncertainties, personal responsibilities or other obligations. Did you fall into this category in 2015?
A Simplified Employee Pension Plan ("SEP") provides for post year-end tax mitigation. This effectively allows the business owner to look through a crystal ball to see how their business will operate between year-end and the extended filing deadline (usually September or October of the following year). This extra time allows business owners to assess the performance of their business well into the New Year and determine if they are capable of then funding a contribution for the prior year. The advantage of SEPs (and most other retirement plans) is that you will not only receive a deduction on your prior year tax return resulting in significant tax savings, but the money is set aside for your future wellbeing.
I often meet new clients after the end of a tax year. Many have not done any tax planning and experience distress over the amount of their tax due. They wonder what planning opportunities exist after the fact. Using a SEP constitutes one of my favorite planning tools for assisting new clients that come to me after the end of the year with large tax balances due.
Some of the SEP limitations and qualifications are:
- Depending on various factors, you may fund up to 25% of your compensation to a maximum of $53,000 per year. So if you made $200,000, you may be able to set aside $50,000 for yourself; while saving $20,000 on your tax bill.
- Employees over age 21 that have worked for three of the last five years and have wages greater than $600 are eligible to participate.
- No IRS reporting requirements as long as plan participants receive appropriate plan documents.
- You may implement one for your business up to the extended due date of your 2015 return, usually September 15, 2016 for corporations and partnerships (and October 15, 2016 for sole proprietors and most single member LLC owners).
- The cost to establish a SEP is minimal.
Please contact me, Bob Charlton, CPA and Partner at (973) 328-1825 if you have any questions or concerns regarding Simplified Employee Pension Plans or if you believe than an SEP would be right for you.