Starting Your Business/Keeping
Tax Records
What are Business Expenses
Employee Pension/Retirement Plans
Retirement plans are savings plans that offer you tax advantages
to set aside money for your own and your employees' retirement.
They include profit-sharing plans, which let your employees or
their beneficiaries share in the profits of your business.
- Simplified Employee Pension (SEP).
- SIMPLE Retirement Plan.
- Qualified Plans (Keogh Plans).
- Individual Retirement Arrangement (IRS).
A Simplified Employee Pension (SEP)
is a written plan that allows you to make deductible contributions
toward your own and your employees' retirement without getting
involved in more complex retirement plans. A corporation also
can have a SEP and make deductible contributions toward its
employees' retirement. But some advantages available to Keogh
and other qualified plans, such as the special tax treatment
that may apply to lump sum distributions, do not apply to
SEPs.
Under a SEP, you make the contributions to an individual retirement
arrangement (called a SEP-IRA), which is owned by you or your
common-law employee.
Visit our website for updated information on SEP
Contribution and Deduction Limits, Reporting SEP Contributions
on Form W-2.
A SIMPLE plan (Savings Incentive
Match Plan for Employees) is a written salary reduction arrangement
that allows a small business (an employer with 100 or fewer
employees) to make elective contributions to a SIMPLE retirement
account on behalf of each eligible employee. An eligible employer
is generally not allowed to maintain another retirement plan.
Setting Up a SIMPLE Plan
If an employer has 100 or fewer employees
who are paid at least $5,000 by the employer in the preceding
year, the employer may be able to set up a SIMPLE plan on
behalf of eligible employees. The plan can be either of the
following:
- A SIMPLE IRA for each eligible employee.
- Part of a qualified cash or deferred
arrangement (a 401(k) plan).
The SIMPLE plan generally must be the
only retirement plan of the employer to which contributions
are made, or benefits are accrued, for service in any year
beginning with the year the SIMPLE plan becomes effective.
Contributions to a SIMPLE plan are deductible
by the employer and excluded from the gross income of the
employee.
For more information on SIMPLE
Contribution Limits, visit our website.
Qualified Plans (Keogh Plans)
A qualified employer plan set up by a
self-employed individual is sometimes called a Keogh or HR-10
plan. A sole proprietor or a partnership can set up a qualified
plan. A common-law employee or a partner cannot set up a qualified
plan. The plans described here can also be set up and maintained
by employers that are corporations. All the rules discussed
here apply to corporations except where specifically limited
to the self-employed.
The plan must be for the exclusive benefit of employees or their
beneficiaries. A qualified plan can include coverage for a
self-employed individual. A self-employed individual is treated
as both an employer and an employee. As an employer, you can usually
deduct, subject to limits, contributions you make to a qualified
plan, including those made for your own retirement. The contributions
(and earnings and gains on them) are generally tax free until
distributed by the plan.
For information on Kinds
of Qualified Plans, Plan Approval and Deduction Limits, visit
our website.
Individual Retirement Arrangements
An individual retirement arrangement (IRA) is a personal savings
plan that allows you to set aside money for your retirement or
for certain education expenses. You do not have to set up IRAs
for your employees or make contributions for them. You may be
able to deduct your contributions, depending on the type of IRA
and your circumstances. Generally, amounts in an IRA, including
earnings and gains, are not taxed until they are distributed.
In some cases, your earnings and gains may not be taxed at all
if they are distributed according to the rules. For more information
on IRA, see Publication
590 Individual Retirement Arrangements.
Important References:
Publication
535 Business Expenses
Form
5305-SEP Simplified Employee Pension-Individual Retirement Accounts
Contribution Agreement
Form
1040 Schedule C Profit
or Loss From Business
Form
1040 Schedule F Profit
or Loss From Farming
Form
1065 U.S. Partnership Tax Return
Publication
560 Retirement Plans for Small Businesses
Publication
590 Individual
Retirement Arrangements