SELF-EMPLOYED? MAKE (AND DEDUCT) A RETIREMENT CONTRIBUTION
Self-employment comes with a lot of benefits – freedom to set your own schedule, and sometimes even higher pay. However, tax time in particular can be daunting if you don’t know how to maximize benefits which can result in a lower tax bill.
In terms of numbers, the goal with self-employment should always be to maximize the amount of gross income in real life – the more payments coming into your checking account, the better, right? But the key is to then shift your mindset to use every expense possible that can be deducted against your gross income, to result in the lowest possible net income number, on paper. So, it’s in your best interest to track and understand possible deductions that are available to you.
Here's the big one that self-employed people often overlook: making a contribution to a retirement plan.
SEP-IRAs are retirement accounts designed for self-employed people, and having one can provide many benefits, including:
- They are relatively easy to open, at nearly any investment company;
- The annual limit for contributions are much higher than traditional IRAs: 25% of net earnings, up to $61,000 for 2022 ($66,000 for 2023);
- The contribution deadline is not until you file your return (even if you are on extension), giving account owners additional time to make contributions for the prior year; and
- Saving and investing – in any type of account, really – can only be beneficial in the very long term.
But the biggest benefit is arguably this: Contributions can be deducted against gross income. This can be a boon for self-employed people looking for larger deductions and ways to lower their tax bill.
Unlike employees of many corporations, who are often automatically enrolled in their company’s 401(k) or 403(b) plan, self-employed people are their own employer. As such, they have to purposefully open and contribute to a retirement plan.
Your tax preparer or financial advisor should be able to walk you through making an annual SEP-IRA contribution – don’t let this valuable deduction go to waste!