Taxation

Finance allah shmoop what is s e p or sepp

what's that i'm sorry we had to go there Think

simplified employee pension plan except it's basically a personalized pension

plan for business owners and is kind of a form

of an ira The company contribute some amount of money

to the sep and they get a tax deduction like

they can deduct that is just a normal expense of

running The business like engine is part of your normal

operating costs You're running a business That amount of money

is generally capped as a percentage of the total compensation

given to the employees And step is an obvious tax

deferment system for sole proprietors who can take advantage of

this delay in pink tax is a kind of way

to fund their own retirement The big catch here is

that what the big boss pays herself while she has

to pay to her employees as well Or rather she

has to contribute the same percentage to their set that

she has for her own compensation when the step is

finally distributed often decades later those distributions are then taxed

at normal ordinary income tax rates So yeah if you

own a small chain of dry cleaners shops specializing in

removing blood stains from clothing of mafia victims Well then

you probably have enough money where it makes sense to

set up your own set plan That way you can

defer income and taxes on that income to a much

later date when presumably your marginal tax rate will be

lower than it is today That is if today you've

earned two hundred grand and you're marginal tax rates forty

five percent then you only keep fifty five cents on

the last dollars that you earn But a couple of

decades from now well you might be retired having already

put your kids through assassins college and now instead of

needing one hundred sixty three thousand dollars a year in

net income after taxes while you live just fine on

fifty grand So as you distribute back to yourself you're

sepp which works just like that I remember instead of

paying forty five percent tax on that marginal dollar you've

distributed back to yourself Well now you only pay something

like twenty percent tax so you keep eighty cents on

those last dollars instead of only fifty five Well a

set plan highly encourages people to save for old age

or retirement The key differences between a normal ira and

accept well in a seth you the business owner are

the employer so only you contribute money to the sep

like in normal cos one of the big benefits the

company provides is matching a dollar for a dollar in

ira contributions So if you're saving five grand a year

into your eye right while your company with unlikely contribute

an additional five grand into it So yeah in a 00:02:43.75 --> [endTime] nutshell that is wass ab sip Maybe not Whoa