Retirement plans are savings plans that offer you tax advantages to set aside money for your own and your employee's retirement. They include profit-sharing plans, which let your employees or their beneficiaries share in the profits of your business.
Sole proprietors can use the following retirement plans.
Simplified employee pension (SEP). A simplified employee pension (SEP) is a written plan that allows you to make contributions toward your own and your employees' retirement without getting involved in the more complex Keogh plan.
Under a SEP, you make the contributions to an individual retirement arrangement (called a SEP-IRA), which is owned by you or one of your employees. The contributions to each employee's SEP-IRA cannot exceed the smaller of 15% of the employee's compensation or $30,000. The same limit applies to your own SEP-IRA.
Contributions to a SEP-IRA are deductible within limits and generally are not taxable to the plan participants. The most you can deduct for employer contributions for employees is 15% of the compensation paid to them during the year. When figuring the deduction for employer contributions made to your own SEP-IRA, compensation is your net earnings from self-employment after making certain adjustments.
You deduct contributions for yourself on line 28 of Form 1040. You deduct contributions for your employees on line 19 of Schedule C.
Caution:
You are no longer allowed to establish a salary reduction arrangement under a SEP (called a SARSEP). However, participants (including new participants) in a SARSEP that was established before 1997 can continue to elect to have their employer contribute part of their pay to the plan.
More information. For details about SEPs, see Publication 560, Retirement Plans for Small Business.
SIMPLE retirement plan. A SIMPLE plan is a written arrangement that provides you and your employees with a simplified way to make contributions to provide retirement income for your employees. Under a SIMPLE plan, employees may choose whether to make salary reduction contributions to the SIMPLE plan rather than receiving these amounts as part of their regular compensation. In addition, you will contribute matching or nonelective contributions on behalf of eligible employees. You deduct contributions for yourself on line 28 of Form 1040. You deduct all contributions (including matching contributions) on behalf of employees on the appropriate line of Schedule C.
You can set up this plan if you:
More information. For details about SIMPLE retirement plans, see Publication 560.
Keogh plan. A Keogh plan is a written plan that allows you to make contributions toward your own and your employees' retirement. But the rules for this plan are more complex than those for a SEP and a SIMPLE plan. Contributions are not taxed to your employees until plan benefits are distributed to them. You generally can deduct contributions to the plan. You deduct contributions for yourself on line 28 of Form 1040. You deduct contributions for your employees on line 19 of Schedule C.
For details about Keogh plans, see Publication 560.
Individual retirement arrangements (IRAs). You can set up and make contributions to an individual retirement arrangement (IRA) if you received taxable compensation (including self-employment earnings) during the year and have not reached age 70 1/2 by the end of the year. You can have an IRA whether or not you are covered by any other retirement plan. However, your deduction for the IRA contributions may be reduced or eliminated if you or your spouse is covered by an employer's retirement plan (including any Keogh, SEP, or SIMPLE plan for your business). For more information about IRAs, see Publication 590, Individual Retirement Arrangements (IRAs) (including SEP-IRAs and SIMPLE IRAs). That publication explains: