In this video Mark Kohler explains the mechanics, limits, and tax implications of a SEP (Self‑Employed Pension) and compares it to a solo 401(k) used within an S‑corporation structure. He outlines how a SEP works for sole proprietors, the contribution limits (up to 25% of profit or $54,000), and the deadline for making contributions that can be deducted for the prior tax year (Sept 15 with extension for S‑corp, Oct 15 for Schedule C). Kohler then illustrates the hidden cost of a SEP: the full self‑employment tax (15.3%) must be paid on the profit before the contribution, effectively costing $15,300 to get a $25,000 deduction in his example. He contrasts this with a solo 401(k) in an S‑corp, where a salary/dividend split (e.g., $30k salary, $70k K‑1) allows the employee portion to be subject only to FICA (≈15%) on the salary, reducing payroll tax to $4,500 while still contributing the same $25,000 to retirement. This yields a $10,000 tax saving versus the SEP. Kohler walks through the timeline for switching: create an S‑corp in the new year, set up a self‑directed 401(k) (≈$1,200 fee), make the contribution, and optionally roll the old SEP into the 401(k) tax‑free. He acknowledges that for lower‑income individuals a SEP may still be appropriate, especially when they cannot afford higher 401(k) contributions. The video concludes with strategic advice to work with qualified tax, accounting, and legal professionals, and provides links to his library of tax‑legal resources and a call to subscribe for ongoing tips.
Chapters
Hi, Mark Kohler here with another tax and legal tip. I want to talk about the sep, the self employed pension. Now these are old school and I generally do a whole video titled I screwed up and did a sep. What do I do now? But before I offend too many of you old schoolers out there, there is a place for the sep, but it's a very thin place where we'll put the SEP strategy into your tax and legal plan. Other than that, I've got better recommendations. So let's jump into it. First, let's talk about how the SEP works. So here you are. Now for those of you that have watched many of my videos and hopefully you have subscribed to my channel and you're watching some of these videos off and on, you'll know I'll put operations on one side, assets on the other. So as you're building your SEP for many of you that have a sole proprietorship now, maybe an S corp, but an LLC taxed as a sole proprietorship or just a plain old sole proprietorship. So I'm going to put a little dashed circle here for sole prop. This is where most people use the SEP because they're kind of stuck with it. You can take your profit and contribute up to 25% of your profit into a SEP. Now a SEP is like a supercharged IRA, better than the average IRA in America can do. So that's good. But I can do a SEP and I can do up to 25% or $54,000. So as Max, that's my max. And this is where asep how a SEP functions and that's great. Now here's how they can be helpful is that if you're in a given year, so let's say this is right now, 2016. You're looking for a tax deduction in 2016 and you've got income there and you've made $100,000 in profit and so you want to put $25,000 in your SEP, you can contribute into your SEP for 2016. This is the I screwed up and all I can do is a SEP plan that I refer to where you can put $25,000 into your SEP and get a tax deduction for 2016. That's great. And you have up until September 15th to do it as long as you file an extension. So that's a really in fact I should say that's if you're an S corp or in a two member llc. But if you're in a even filing as a schedule C, you have until October 15th. So you can put this $25,000 way into the fall and still get a tax write off in 2016. That's what's good about a SEP and that's about where that ends. So, so now let's talk about the problems of a sep and I'm going to use a red pen for this. So let's say you've got 125,000 of income, 25,000 in expenses and you've netted 100,000. So easy, kind of like our last example, you can put 25% of your hundred grand and you've got 25,000 now sitting over in your SEP. Well that's great but how much did that cost you to do that? That's a big deal. You had to pay self employment tax of 15.3% so you spent $15,300 to get a $25,000 write off. Okay, could we do better than that? Yes, we can. Now let me show you a better way. This is where we compare the SEP in a sole proprietorship to a 401k in an S corporation. Now some of you may be anti corporation because you think there are a lot of work or expensive in the state you live in but wait till you see the numbers. Let's go back to red and blue here for a minute. Let's compare apples to apples. Sep2,401k with the same amount of income. So I bring in 125,000, I bring in 125,000 into my S corporation. I spend 25,000 on expenses, I spend 25,000 on expenses over here, nothing special, I net $100. Alright, so now holding all things equal, where we, where do we go with this? Well if I'm over here in the SEP, remember from the last clip, I'm going to put 25% into my SEP. That's great. Which is $25,000 but it cost me $15,300 in taxes to do it. Now what's cool about a 401k is we do the salary dividend split. I call it the salary dividend. Some of you accountants hardcore, you're going to say it's called a K1, it's net income. I get it. But for the average person it makes sense to call it a salary dividend split because I take your profit and I change it into two pieces, I turn it into a W2 and a K1 kind of call it that dividend piece and I do a 30% split. So I'll put $30,000 on a W2 and 70,000 on your K1. Very common. We've been doing it for years. We've never had a client audited in 15 years doing a third allocation or different. I've got my Kohler payroll matrix. You can watch it on some other YouTube videos. So we know what we're doing here. Bonafide CPAs. If your accountants telling you you can't take a salary that low, call me, we'll work it out. So you CPAs out there, I've got info for you. But in this example, I gotta give you the disclaimer. I'm gonna take a salary of around 30 and a pass through dividend of 70. I still make 100 grand, but I call part of it salary and part of it K1. Now the beauty of this is if I do a 401k. So we'll come over here, use our blue. We're gonna put money in our 401k. I can put up to $18,000 in it, plus 25% of my salary. And you may go, well, Mark, 25% of 30 is kind of crappy. That's only $7,000. You're putting in 25. 5. 7,500. I'm not, I'm gonna. You're only putting in 25. 5. That's. That's kind of a crazy thing. Sorry. 25 5. I would like to put in more. Well, with the S Corp, we can do more based on fluctuating your salary or the more money you make, the more I can put in. But look at this. I put in the same amount, 25,000 approximately in my 401k or 25,000 on my set. But here's the kicker. I am only. There's a new color here. I am only paying FICA of 15% on the payroll. I just paid 4,500 in payroll rather than 15,000 in payroll. So, guys, I saved over $10,000 by using an S Corp 401K rather than a SEP inside a sole proprietorship. And guess what? I ended up with the same $25,000 in my retirement account. It's either in a 401k, 25 grand. So this is ugly, isn't it? 25 grand in my 401k or I've got 25 grand in my SEP, but it cost me $10,000 less to do it. So let's finish this up with our timeline. Let's say you're in 2017, you're wanting to deduction for 2016. You can still create a SEP and put your $25,000 in your SEP and get a tax deduction for 2016. But now that you've watched this video, you've learned you don't want to get stuck with that again in 2017. So what you do is you form an s Corporation in 2017, create your 401k. We charge like 1200 bucks for a self directed 401k that you control. No stockbrokers, you're in control of that 401k checkbook, start to finish 401k. You put in your 25,000 this year. Now you get a tax deduction in 2017 which you can still deposit in 2018 if you have to. People, you still get the write off retroactively as long as the 401k is set up before the end of the year 1231. But you set up the 401k and now you're saving money in 2017, making the deposit in 2018 if you want to next year. But look it, you can take the old SEP and roll it into your 401k tax free. So at the end of the day you have 50 grand sitting in a self directed 401k that you control and you save $10,000 in taxes doing it all. One final point for some of you that say, Mark, I can't afford $25,000 or more in a 401k right now, but I do want to put away more than 5,000 in an IRA. So you're somewhere in the middle. 10, 12, $15,000. The SEP could be a great fit for you still. There's a cross section of you out there where you're seeing this benefit of a SEP and still controlling your self employment tax cost. Then as you start to make more money, you implement the 401k, drive down your salary, you see what's happening. You're putting more money in retirement, giving less money to the irs. I call that a perfect fit. So I love that. Now this is where a little bit of strategy with a qualified tax law firm, accounting firm, law firm that work together, that's us half hour, hour together, once or twice a year, we can save you thousands. Be careful just going out on the web and click, click, click and trying to figure it out. You've watched this video, now you're the captain of your ship, you've seen a way here that you can smooth sailing. You know, it's new path, new course. Well, let us, your first mate implement it for you affordably and simply. So hopefully that'll be a good help for you as you talk to your own advisor and bring them up to speed or change advisors altogether. We hope we can be there for you. Thanks so much for watching and if you found that helpful please look in the description below. I've got links to my tax and legal library, my QuickBooks training videos, how to start a small business 50, 60, 70 videos, some as long as 30 minutes explaining more information on tax and legal strategies that will change your life. Also, if you'd like to subscribe to my newsletter or check out my social media links please click here. There are weekly free tips and strategies and articles that you'll find extremely helpful and I would appreciate it if you'd subscribe to my channel. I've got so many videos here I produce every week on my YouTube channel and I'd love to give you a ping every time I shoot a new video. Thanks so much and keep living the American dream.
