To shelter self-employment income, look into using a simplified employee pension (SEP) plan. The maximum contribution is substantial (up to $42,000 in 2005) while there’s little paperwork.
As the name suggests, SEPs are simplified. To establish a SEP, someone with self-employment income need only fill out IRS Form 5305-SEP. This form is much less onerous than the lengthy plan and trust documents required by profit-sharing plans or money-purchase plans.
Because a SEP is not a qualified plan, no trust fund is involved. What’s more, the set-up form does not have to be filed with the IRS. No annual reports need be filed, either
Many self-employed individuals think in terms of “Keogh” plans. Keogh plans (which can be defined contribution or defined benefit plans) are more complex and costly to administer than SEPs, yet the contribution limits are virtually the same. Most banks, brokerage firms, and mutual fund companies will provide the scant paperwork you need for a SEP plan.
