Sandy said:
During this year, I made some money (mostly commissions from
companies) and I recieved a 1099-MISC form with about $100k in income.
Now I want to open a SEP for myself. Is this possible? I heard I have
to give myself wages (W2 form) in order to do this. But I am the only
person in my business and I hire no one else. Any advice would be
appreciated. Thank you.
Yes, a SEP plan would be ideal in this situation. There is some
messy paperwork involved in setting up a SEP plan. Some folks
choose to use the Simple plan instead. The Simple is much easier
to set up, but it has lower limits for what you can put away.
Best thing to do is see your financial planner or broker. Either
one can set you up. The best choice is at a company that offers
a wide variety of funds including no-load low-cost index funds
like the Vanguard family.
There is no need to do W-2 wages. With a sole propritorship,
you and the business are one in the same. You report your
business income and business expenses on Schedule C. If you
made a profit from this business activity, you can put a
percentage of it into the SEP or Simple. The remainder of
the profit is then added to your adjusted gross income on
the 1040. If you had shown a loss for the year, then that loss
would simply be subtracted from your adjusted gross income on
your 1040.
You are going to pay a lot of taxes on this money. Make sure
you take every possible legitimate expense item involved in
earning this money as a business deduction. This includes car
expense, mileage, books, magazines, postage, office supplies,
meals, travel, etc. Every dollar of expense you think of means
30 cents in your pocket.
Next, make the maximum SEP contribution you can. Due to the
tax effect, every dollar you put in results in a 30 cent rebate
from the IRS (due to not having to pay taxes on that money).
Finally, you most likely needed to pay quarterly tax estimates
on this money. If you didn't do that, you likely are going to
either get a fine, or have to pay penalties. As I recall, if
you pay all the quarterlies for the year by Jan 15, you may be
able to avoid a fine, and greatly reduce the penalty that you
might owe. See a good accountant ASAP on this -- with $100K
of 1099 income, making a mistake here could have a large dollar
consequence.
-john-