Sole Proprietors and Small Business Owners

Greg Stevens, CFP, CRPS | Senior Wealth Advisor

You may still be able to decrease your 2016 tax liability.

“Even though we’re well into 2017 and the April 17 tax filing deadline has passed, those with self-employment income and small business owners may still have the option to manage their tax liability by simply making a contribution to a retirement plan. Even better, if you haven’t yet established a retirement plan, you still have a chance to create one right up until your tax filing deadline (plus extensions).”


A SEP IRA is a retirement savings vehicle designed for those with self-employment income as well as small business owners. The beauty of the SEP is that the plan itself can be established right up to the point at which you file your taxes and your contribution will count toward the tax year for which you are filing. For example, you could extend your tax filing date until October 15, 2017 and create the SEP prior to that filing and fund it to offset your 2016 tax liability.

How Much Can You Contribute?

The IRS allows you to contribute up to 20% of your NET schedule C income (your income after deductions for expenses and half of the self-employment tax) up to a maximum of $53,000 for 2016. If you have employees, you’ll need to contribute the same percentage on their behalf. Contributions made to employees are immediately 100% vested (it’s their money).

Tax Benefits

Contributions to a SEP are made on a pre-tax basis and effectively lower your taxable income. All contributions grow tax deferred (no taxes on dividends or capital gains) and are only taxed when withdrawn. Distributions made prior to attaining age 59.5 will be taxed and assessed an additional 10% early withdrawal penalty.

Another Option

Sole Proprietors may also want to consider an individual 401(k). The contribution limits are higher and the tax benefits work the same way as the SEP. You’ll need to establish the individual 401(k) by December 31 of the tax year for which you intend to make the contribution. Funding the 401(k) can wait until your tax filing deadline.

Utilizing tax savings strategies is an important tool to helping everyone meet their long-term goals. Contact your financial advisor or accountant for more details about opportunities that fit your needs.

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