by Sam Weaver

Created on: June 11, 2009

If you are like me, your small business generates more income and expenses, but not enough to hire a payroll company to handle all of the messy details of big company benefit packages. This does not mean that you have to forgo the tax benefits of creating and contributing to a pre-tax retirement account.

The SEP IRA is the most popular option for small businesses. You can use it whether you are an employee of your corporation, or you are self-employed. The company must contribute the same percentage to all of it's employees, and the the maximum percent is 20%. The maximum dollar limit for 2009 is $46,000. The is a company contribution, not a payroll deduction. You must report the contributions as both Social Security and Medicare Wages and report the contribution as Retirement Income.

The SIMPLE IRA is what I use. You need to be an employee of your business. The limits are not based upon the percent of your income, so you can contribute more that 20%. However, the contribution is much lower than the SEP IRA. In 2009, the employee contribution limit is $11,500 for individuals under 50 years old. For age 50 and older, the contribution limit is raised to $14,000. There is also a mandatory Company Contribution. The company can choose to match each employees contribution up to 3% of their total salary or a flat contribution of 2% of each employee's salary no matter what their contribution is. The employee contributions are subject to both Social Security and Medicare Taxes. The company contributions do not need to be reported on your employees' W-2 forms since they are not subject to income or payroll taxes.

The Individual 401 (K) plan can only be used by self-employed individuals or business that only have the business owner and their spouse as employees. For 2009, this plan allows the individual deduct up to $16,500 ($22,000 for Age 50 and older individuals). In addition, the company can contribute up to 25% of the individual's salary to the 401 (K) account. You may also make loans from your Individual 401 (K) account without incurring tax penalties. The employee deductions are still subject to Medicare and social security taxes.

So the big question...Which is the right plan for me?

1. If you want to put less than 20% of you salary or self employment income in a retirement plan and plan to earn less than $200,000, than I would recommend using the SEP IRA plan.

2. If you earn less than $60,000 and would like to put more than 20% of your income in a retirement plan, then I would recommend a SIMPLE IRA

3. If you earn over $200,000, I would recommend hiring an accountant and listening to their advice. They will probably recommend an Individual 401 (k) plan.

As always, I am not a lawyer or a tax accountant, and free advice is only worth what you pay for it. Investment houses like Vanguard will help you with the paperwork to set up a retirement account with a wide array of investment options from low risk to high risk funds. I can manage my payroll and tax reporting using a free payroll service from Bank of America, but it is not without stress.

Good luck on your business ventures!

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