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The payoff of creating a Simplified Employee Pension plan, or any other retirement plan, can be huge for a small business. The main advantage is that it is a major tax deduction. For example, an employer can deduct up to 25 percent of an employee’s compensation, or up to $42,000 in the 2005 tax year.
SEPs have other advantages. They are the easiest to set up. A bank or other financial institution can help you set it up, and they require minimal paperwork to maintain. Additionally, you are not required to file annual reports with the government as you must with more complicated plans such as 401(k)s or profit-sharing plans (as long as you don’t maintain one of those programs as well).
The good news is that if you would like to take advantage of a SEP for the 2005 tax year, you still have time. The deadline for setting up one of these plans, or making your prior-year contribution to one, is the due date of your tax return. This year that is April 17th.
You can find information about the various retirement plan options on the IRS Web site. The agency has an Online Resource Guide at http://www.irs.gov/retirement/article/0,,id137308,00.html with details about SEPs and some of the other popular plans. Other resources include IRS Publication 560, Retirement Plans for Small Business, downloadable from the IRS site.
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