Tax Strategy for small businesses and the self-employed

Education & Training with KLSM CPA Firm, PLLC

Self-employed individuals and small business owners with excess income should consider setting up SEP IRA.


There are 7 different types of IRAs including the Traditional, Roth, SEP, Nondeductible, Spousal, SIMPLE, and Self-directed. Each IRA has its advantages and disadvantages, however for this blog post, I would like to focus on the SEP IRA.


A Simplified Employee Pension (SEP) provides a easy way for employers to make contributions for their employees' retirement as well as themselves. A SEP IRA is best for self-employed individuals or small business owners with few or no employees as it allows you to save and invest significantly more, as a tax deductible contribution, than you can with a traditional IRA. 


What are the rules?

  • The employers contribution cannot exceed lesser of 25% of compensation or $56,000 for 2019, subject to a $280,000 compensation cap.
  • Must be a written plan (IRS Form 5305-SEP).
  • Eligible employees include those that have worked 3 of the last 5 years and earned at least $600 in compensation.
  • A separate SEP IRA should be setup for each eligible employee with the account provider, and 
  • Each eligible employee must receive information about the SEP IRA and a copy of the written agreement (Form 5305).


What are the pros and cons of a SEP IRA?



 - Contribution limit of $56,000 in 2019

 - Easy to setup and administer

 - No requirement to contribute every year

 - All contributions are tax deductible, including those made for the benefit of employees

 - It's ok to combine with a Traditional or Roth IRA


 - No catch-up contribution for folks 50yrs or older

 - Required proportional contributions for eligible employees if you contribute for yourself (ex. 15% per employee)

 - Required minimum distributions begin at age 70.5yrs

 - Early distributions before age 59.5yrs are income and subject to 10% early withdrawal penalty

 - Must include all eligible employees


Tips to avoid common mistakes identified by the IRS:

  • Review your written plan annually, to ensure that it agrees with current law
  • Review employee eligibility on an annual basis
  • If you own multiple businesses, be sure to include eligible employees from those related businesses


KLSM CPA Firm PLLC is a local Houston, TX CPA firm that empowers individuals and small businesses by providing accounting and tax solutions for financial success. We also assist our clients with tax resolution matters such as sales tax, payroll and income tax issues in Houston, TX, San Antonio TX, Austin, TX and elsewhere.





Comments (19)

James Dray
Fathom Realty - Bentonville, AR
Exceptional Agents, Outstanding Results

Morning Krystin.

I'm well over the age that I can contribute to an IRA.  I do have two sons who will be interested in this, so I'll pass it on

Oct 22, 2019 01:46 AM
Sally K. & David L. Hanson
EXP Realty 414-525-0563 - Brookfield, WI
WI Real Estate Agents - Luxury - Divorce

This is great information to share with everyone who chooses to be self employed.

Oct 22, 2019 04:46 AM
Brian England
Vacasa - Gilbert, AZ
MBA, GRI, REALTOR® Real Estate in East Valley AZ

My accountant has been bugging me to open up a SEP for a while, but I have always preferred to contribute to my Roth IRA.

Oct 22, 2019 07:10 AM
Michael Jacobs
Pasadena, CA
Los Angeles Pasadena 818.516.4393

Hello Krystin - definitely food for thought and without any of those nasty calories.

Oct 22, 2019 08:39 AM
Rebecca Gaujot, Realtor®
Lewisburg, WV
Lewisburg WV, the go to agent for all real estate

Krystin, thanks to Barbara Todaro for reblogging your post and now I will be following you to keep abreast of tax issues.

Oct 22, 2019 12:34 PM
Krystin Mitchell, CPA CFE

Thanks Barbara Todaro for the re-blog and Rebecca Gauhati for the follow.

Oct 22, 2019 02:31 PM
Kathy Streib
Room Service Home Staging - Delray Beach, FL
Home Stager - Palm Beach County,FL -561-914-6224

Krystin- this is excellent information that I'm sure many here will welcome!!! You've also done a good job of explaining the pros and cons of the SEP IRA. 

Oct 22, 2019 07:21 PM
Kimo Jarrett
WikiWiki Realty - Huntington Beach, CA
Pro Lifestyle Solutions

Could you setup a SEP IRA and when your business grows, retire your SEP IRA and start a SIMPLE IRA without restrictions or penalties? 

Oct 22, 2019 11:52 PM
Diana Dahlberg

Good question!

Oct 24, 2019 10:33 AM
Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

Krystin, great information, and usually my CPA lets me know what I need to do to reduce the amount I would need to pay! 

Oct 23, 2019 08:54 AM
Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Setting up a SEP IRA has really good advantages for small business.  Nice treatment of the subject.

Oct 23, 2019 09:10 AM
Will Hamm
Hamm Homes - Aurora, CO
"Where There's a Will, There's a Way!"

Hello Krystin, Thanks for the great information that we all can use here in the rain.  Make it a great day!


Oct 23, 2019 09:42 AM
Diana Dahlberg
1 Month Realty - Pleasant Prairie, WI
Real Estate in Kenosha, WI since 1994 262-308-3563

Thank you for sharing this useful information. I will be sharing with my husband.

Oct 24, 2019 10:34 AM
Cate Griffing
West Magnolia Charm - Maywood, NJ
Home Decor Blogger creating beautiful spaces

This is great information. My husband and I were just talking about IRAs the other day. 

Oct 29, 2019 08:28 AM
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

I so wish self-employeds sought out and received more professional advice, Krystin Mitchell, CPA CFE ... as it certainly would help their bottomline ... and their efforts at the time of mortgage application too.

Keep the great advice coming!


Oct 29, 2019 10:08 AM
Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

Krystin, I like this feature, as it does reduce my payment, and makes me save too! 

Nov 04, 2019 06:27 AM
Roy Kelley
Realty Group Referrals - Gaithersburg, MD

I hope you are enjoying a very productive autumn.

Have an outstanding November.

Nov 06, 2019 12:33 PM
Robert Vegas Bob Swetz
Las Vegas, NV

Hello Krystin and a interesting post ...

I also work construction and have a 401K and pension. I have spoken to other workers and they mentioned going into their account and changing it. By doing this they get a higher yearly return.

What are your thoughts on this subject and is there anything I can do with my accounts that would make more money for me?

Nov 24, 2019 07:33 AM
Krystin Mitchell, CPA CFE

Hi Robert Vegas Bob Swetz, 


Thank you for your comment. I advise each of my clients based on their personal situations. There are instances where a SEP is useful but also a traditional and roth IRA. The strategy I recommend depends entirely on the clients tax situation, financial goals and long-term goals. 


Thanks, Krystin

Nov 24, 2019 06:53 PM
Debe Maxwell, CRS | The Maxwell House Group | RE/MAX Executive | (704) 491-3310 - Charlotte, NC
The right Charlotte REALTOR!

We are all about the SEP IRAs too, Krystin and you have done a really nice job of explaining why! 

Hope you're having a stellar start to your week!

Dec 02, 2019 07:12 PM
MichelleCherie Carr Crowe Just Call...408-252-8900
Get Results Team...Just Call (408) 252-8900! . DRE #00901962 . Licensed to Sell since 1985 . Altas Realty - San Jose, CA
Family Helping Families Buy & Sell Homes 40+ Years

I'm anyone who needs to know about SEP IRA's will find this post helpful.

Jan 17, 2020 07:58 PM
Maria Gilda Racelis
Home Buyers Realty, LLC-Manchester, Bolton. Vernon,Ellington - Manchester, CT
Home Ownership is w/in Reach. We Make it Happen!

Hi Krystin Mitchell, CPA CFE , nobody needs tax or filing advice more than the independent contractors. This is a very important advice. Thank you.

Jan 18, 2020 05:04 AM