If you happen to be self-employed in 2023, then you have an amazing opportunity to take advantage of a key tax strategy that can reap benefits on many fronts. Here’s the deal, retirement plans if implemented properly can provide you with those extra tax write-offs and savings which you have always craved for. If you are a business owner and don’t want to be involved with the complexities of 401(K) accounts, or IRA then a SEP IRA or SIMPLE IRA might just be the perfect opportunity.
The benefit of working with a SEP IRA is that anybody self-employed can set it up. You could be the only person in your business, or you could have multiple employees. This wonderful strategy will allow you to not only take care of your future but get additional money to invest in your business. You also end up avoiding those inflated administrative costs/management fees when you set up a plan like this.
If you operate a partnership, be careful! Any payments made to partners via their retirement plans are not tax deductible and instead flow through to the K-1 and then are only deducted on their personal returns. A lot of our real estate syndicate and partnership clients ask about this all the time, and it’s important to be aware of these minor details. Here’s an example to illustrate how much you can contribute if you happen to be self-employed and looking to open up a SEP IRA:
If your income is $350,000 and let’s say that the employer portion of the self-employment tax is around $15,000 then $350,000 – $15,000 = $335,000 is that basis for calculating how much you should contribute to your SEP IRA. Now that we have calculated the compensation portion, what about the contribution amount? Don’t worry we’ll get there, but this is the complex part – you need a qualified CPA to analyze your returns. The CPA will examine your Schedule C, SE taxes, Form 1065, or 1120-S if eligible.
Then we take $335,000 * 25% = $83,750 and there you go, now you know how much you can contribute. The general rule is that your contribution cannot be less than $66,000 for 2023, back in 2021 it used to be around $58,000. BOOM! Now you can use that entire contribution as a tax write-off, isn’t that freaking sweet? To set up a SEP plan you need to make sure you have the 5305-SEP completed, this doesn’t have to be filed but the IRS requires you to keep records.
The deadline to establish a plan and to make a contribution is April 15th, as a one-stop shop we can also guide you to resources that can not only implement this but also teach you some great retirement plan tax strategies to grow your business.
The problem with today’s advisors is that they too often look only to implement plans without looking out for their client’s best interests. As a CPA firm not only is it our fiduciary duty, but we take the extra step of recommending you to people who are the financial industry’s best and brightest.