A simplified employee pension (SEP) plan can help you shelter self-employment income you earned last year, perhaps from consulting or freelancing. You can contribute to a SEP until the due date of your tax return and take a deduction. If you get a filing extension, you also will extend the deadline for SEP contributions.
As the name suggests, SEPs are simple. You can set one up by filling out a brief form and there are no annual reports to submit to the IRS. Many banks, brokerage firms, insurers, and mutual fund companies will help you with the paperwork.
Your contribution to a SEP will be deductible but figuring the amount you can contribute may be tricky. Although the tax code says that you can contribute up to 15 percent of your self-employment income, before you figure that 15 percent you must reduce your self-employment income by one-half of your self-employment tax as well as by the SEP contribution itself.
The bottom line: you usually can contribute about contribute about 12 percent-13 percent of your self-employment income (after legitimate business expenses.) Suppose, for example, you made $12,000 freelancing last year and spent $2,000 on expenses to earn that money. Your self-employment income is $10,000 and you probably can contribute between $1,200 and $1,300 to a SEP.
