A Simplified Employee Pension Plan, or SEP, may be an ideal choice for self-employed individuals or small businesses because it is very easy to administer. A SEP can provide many of the benefits of a standard retirement plan and is easy to establish and maintain. A SEP can also give you more limited responsibility as an employer. Each of your employees is responsible for his or her own SEP-IRA account. This means less administrative hassle for you and also there is a comparatively small amount of government reporting. The typical candidates for establishing SEP accounts are sole proprietors, consultants, and small businesses -- especially those with high turnover rates or younger employees.
How a SEP works
A SEP plan allows you to save up to 20% of your net earnings each year. The annual maximum is $40,000. All of your contributions into a SEP plan are tax deductible. If you have employees, they must be included in the plan as well. You must contribute the same percentage of their earnings as you do personally. All employees who meet the following criteria must be included in the plan:
- Age 21 or older
- Employed by you for any amount of time during three of the last five years
- Received at least $450 of compensation from you in the current year
