There are three retirement plans that allow small businesses to use contributions as a tax deduction by the employer: SEP and SIMPLE IRAs and Individual 401(k). Each plan has its own rules for making those contributions and claiming the deductions.
The SEP plan is one of the most flexible and easy to administer plans available to small business owners. Given the connection between whether the business owner can afford to make a contribution and using that contribution as a tax deduction, the deadline to make contributions is tied to the employer’s tax return due date. The deadline to establish a SEP plan and to make contributions on behalf of employees is the employer’s tax return due date, plus any extensions.
Corporate tax returns are typically due March 15. Partnership tax returns are due April 15. However, if corporations and partnerships apply for a tax filing extension, the due date for both is September 15. If an employer, whether a corporation or partnership, determines that making an employer contribution to a retirement plan will benefit the business, the business can establish and contribute to the SEP plan up until the tax return deadline.
To establish a SEP plan, the employer may contact a retirement plan provider such as The Entrust Group or simply download the IRS Form 5305-SEP from the IRS website, complete the document, sign, and return it. The SEP plan document establishes the requirements to participate in the plan, such as age and length of service. Each participant receiving a contribution must have or open a Traditional IRA or SEP IRA account with a financial institution or IRA administrator. The employer makes a contribution to each eligible employee’s Traditional or SEP IRA. To make sure that the contribution can be used as a tax deduction, the employer should make sure that the contribution is made on or before the business’s tax return due date.
September 15 is also the deadline for making the employer contribution portion of an Individual 401(k) and a SIMPLE plan, the two other common retirement plans established by small businesses.
For more information on small business retirement plans, IRS Publication 560 explains how each plan works and our report examines the tax advantages.
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