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Posted by Tiffany Gaskin

Simplified Employee Pension

Simplified Employee Pension

The simplified employee pension (SEP) IRA is for people that are retired. The scheme was established as a saving retirement plan for employees, and the employers make tax deductible donations to the SEP IRA’s account on behalf of their employers. You can easily open the account with low administrative costs, and employees are privileged to determine what to contribute annually. The account also accepts self-employed workers. The SEP IRAs account accepts more money than the IRA account. But the account is classified as a traditional IRA in keeping employer donations.


SEP IRA rules: who is eligible?

Generally, the SEP IRAs account is generous to self-employed and small business owners. These businesses can have few or no employees. For instance, if a business has employees considered qualified for the plan by the IRS, you'll be forced to make an equal percentage of donations to the account on their behalf.

  • Qualified employees must be 21 and above and have worked for more than three years with your business. They must have earned a minimum of $600 between 2016 to 2020 or $650 in 2020. For example, if an employee has worked from 2019 to 2021 and earned about 750%, you'll have to donate to the employee for the 2022 plan.

  • You can save 15% of your compensation earnings, but you must do the same for your employees in their compensation plan. However, this is an example, but you can refer to the SEP-IRA contribution site to know the limits for 2022 and 2023. 

  • Employees are allowed to determine the direction of their accounts.

  • The rule of equal contributions makes the account the best for self-employed, small businesses, and businesses with few or no employees.


SEP IRA contribution limits

The account, however, is limited to some amounts. The traditional IRA accepts $6,000 annually and $7,000 for gray people (50 and above). But the SEP IRA account accepts ten times the amount. For instance, the limit accepts $58,000 and $61,000 in 2021 and 2022, respectively. However, the contributions can not exceed;

  • 25% of compensation

  • $58,000 in 2021 and $61,000 in 2022

The 25% compensation is calculated to a limit of $290,000 and $305,000 in 2021 and 2022, respectively. There is no catch-up for people above 50 years.


How a Simplified Employee Pension (SEP) Works

Unlike most employer-sponsored retirement plans, the account benefits business owners as it doesn't require high registration fees and operation costs, plus businesses with no employees get the full benefit. Many people use this process to stash amounts not accepted by the IRA. The account and the IRA are similar concerning tax and investment options. Transfer and rollover rules of the IRA apply to such accounts. The fund donated to the accounts is tax-deductible and not specified or imposed by the SEP IRA. The employer has no place in the investment plan. The IRA board selects the eligible investment, and employees are allowed to take part in investment plans. The board donate to the accounts by depositing, sending yearly reviews, and documents for the IRS.


How do I open a SEP IRA?

The first thing to do is get an account provider. You can sit at home and get an account online. The IRA licenses many account providers, but some are faster. Afterward, there are three things to consider when registering for SEP IRA.

Request for the IRS Form 5305-SEP to make a formal written agreement with your account provider.

Inform qualified employees about the SEP IRA options. You can give them the form or link them with the account provider.

Each qualified employee should have a separate account with the account provider.


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Tiffany Gaskin
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