Are you prepared for tax season? Have you thought of using a (SEP-IRA) Self Employed Pension plan to help you reduce your tax liability and prepare for retirement?
In the past five years, job losses in the United States have given people incentives to start their own businesses. These self employed people have become successful financially and have never really been forced to think about how they are going to manage paying their own taxes. With additional money coming in, they need a tax strategy to help them plan for retirement.
The formula they might use in saving for taxes needs to benefit them the most in the long run. You could use the strategy of saving 25%-35% and just leaving the money in a savings account. This will earn you very little interest over the course of a year.
One very good tax strategy is to set up an account that is established as Self Employed Pension or SEP-IRA. These accounts will provide you a reduction in your net earnings and allow your money to grow through investments.
So what is a SEP-IRA? A SEP-IRA is an account set up at banks, insurance companies or financial institutions. You are allowed to make cash contributions up to a set limit per year. You need to check with your tax specialist about the amount limits for your situation. For 2011, the contributions cannot go over $49,000.
When you lower your net earnings from your business, you lower your tax liability. The net earnings from your business is your gross income minus allowable business deductions. This determines your taxable income. Contributions to SEP plans are an allowable deduction.
Setting up this type of account helps you in two ways. You reduce your net earnings and you are able to start contributing to your own retirement plan. Both of these benefits can save you thousands of dollars in the long run and with a good investment strategy for your cash contributions, you stand to earn money on your investments over time.
If you are new to being self-employed and want a good strategy to help you build your assets, consider using an SEP-IRA. You can set these up and contribute to them up until the date your taxes are due. Discuss this tax strategy with your tax preparer and determine if this would help your personal tax situation.
This article is meant as a guide for your education. Please counsel with your tax preparer before taking any action. For the government description of SEP-IRAs, please visit: http://www.irs.gov/pub/irs-pdf/p560.pdf
