If you have been putting off saving for your retirement and are a self-employed individual who reports business earnings to the IRS on Schedule C, consider opening a SEP-IRA, or Simplified Employee Pension Individual Retirement Arrangement.
A SEP-IRA is simply a traditional IRA that holds contributions made by an employer under a SEP plan. You can receive both employer contributions to a SEP-IRA and make regular, annual contributions to a traditional or Roth IRA. Employer contributions made under a SEP plan do not affect the amount you can contribute to an IRA on your own behalf.
You can open and fund this account until the due date for your 1040 using extensions. In other words, if it's 2020 and you haven't contributed anything, you can open one up and add funds for the year until October 15, 2021. The good news is you can do this for free or for a very small fee at most mutual fund companies, brokers and banks. Saving this way means that your contribution is tax-deductible.
A SEP-IRA contribution is pretaxed and can be as much as 20% of your net income. For 2020, the maximum amount is $57,000. This would be 20% of your net income, minus half of your Medicare and Social Security taxes, which are both deductible.
The biggest caveat is that you must make the same percentage of contributions for all covered employees, who are at least 21 and have been employed by you for at least three of the last 5 years and earned at least $550 from you in the previous year. (You can't count your spouse as a covered employee.) You can deduct up to an additional $51,000 for contributions you make to employee accounts as well.
According to tax-prep software giant TurboTax, contributions for retirement plans are the number one tax deduction for self-employed business owners, so it's time to get started on choosing a retirement account!