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Squeeze More Out of a Company SEP

by Mihaela “Mikki” Obreja, CPA, CVA, MBA on April 13, 2022 in IRS, Retirement Planning

Squeeze More Out of a Company SEP

If you want a retirement plan for your small company or self-employed business — but you don’t want to be buried in paperwork — consider a simplified employee pension plan or SEP.

Among the appealing advantages:

  1. SEPs are set up by simply filling out a brief form.
  2. Annual reports aren’t required to be filed with the IRS, although you must provide a copy of the SEP form to each covered employee. (Most retirement plans require detailed reports to be filed with the IRS and the Department of Labor.)
  3. Contributions can go from zero to the maximum each year, so if your company has a bad year you can skip the contribution.
  4. SEPs allow for “look-back” contributions. As an example, you can make a SEP contribution, up until the date you file your tax return (including extensions), and deduct that contribution on that tax return.
  5. Employees make their own investment decisions. All SEP contributions are fully vested and portable. In fact, SEPs are sometimes referred to as SEP-IRAs. The maximum contributions are 25% of compensation for employees, or 20% of self-employment income for sole proprietors, partners and LLC members. The absolute maximum amount that can be contributed to an account and deducted is $61,000 for 2022 (up from $58,000 in 2021).

All in all, if you are a small corporation or self-employed, the ease of a SEP may simplify your life and help fund your retirement. Consult with your tax advisor for more information.

Despite the Advantages, there Are a Few Downsides:

All of the SEP funding comes from you. And you may have to contribute on behalf of employees that you’d like to exclude.

If you have a large, relatively high-paid workforce, sponsoring a SEP can be expensive.

There is 100% vesting right away so you have little or no control over what each employee does with the money. If a staff member wants to take out their funds prematurely and pay the taxes and penalties right away, you can’t prevent it.

Please contact Mikki Obreja via our online contact form for more information.

Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.