Self‑Employed Retirement Plan Contributions: SEP, SIMPLE, Qualified Plans Explained

Self-employed workers across the United States are facing fresh decisions on how to save for retirement as 2024 and 2025 limits and rules settle in. Simpler options like SEP and SIMPLE plans continue to draw the most interest because they avoid filings such as Form 5500 and complex discrimination tests.

According to IRS guidance, contributions for self-employed SEP, SIMPLE, and qualified plans can be deducted as an adjustment to income on Schedule 1 of Form 1040, a feature that lowers taxable income and frees up cash flow for people running one-person firms or family businesses.

Headline Limits and Plan Comparisons

• For defined contribution qualified plans, the annual additions for 2024 cannot be more than the lesser of 100% of net earnings from self‑employment or $66,000.
• Defined benefit formulas can allow much larger tax-deferred deposits in the right cases; the 2024 benefit limit is cited at $275,000.

Why SEP and SIMPLE remain popular:
– Easy to set up and run (no annual Form 5500 filing, no discrimination testing).
– Lower administrative burden for owners of one‑person shops or family businesses.

Why 401(k) and other qualified plans are chosen:
– Greater design freedom (vesting schedules, loans, integrated profit-sharing).
– In some situations, higher contribution ceilings.

The IRS also notes the old term “Keogh plan” is mostly historical; today it simply means a qualified plan for the self‑employed, and the same rules apply whether the sponsor is a corporation or a sole proprietor.

2024–2025 Specifics

• 2024: Defined contribution additions capped at the lesser of 100% of net earnings or $66,000.
• 2025 (SEP): SEP contribution cap reaches $70,000 (current guidance).
  • SEP rules do not allow personal “employee” deferrals or age‑50 catch‑up deposits.
• SIMPLE IRA:
  • Targets firms with 100 or fewer employees.
  • Employer must choose either a 3% match or 2% nonelective contribution.
  • Employee deferrals can reach $21,450 in 2024.
  • Eligibility generally tracks two prior years with $5,000 in pay and $5,000 expected this year.
• Solo (Individual) 401(k):
  • Owner acts as both employee and employer.
  • Can reach totals near $77,500 in 2025, including catch-up for age 50+.
• Defined Benefit Plans:
  • Contributions set by an actuary to fund a promised benefit; can allow very high deposits depending on the promised benefit.

Impact on Immigrant Entrepreneurs

• For many immigrant small‑business owners, retirement plan choice affects more than taxes; it shapes long‑term security for households without employer plans and for owners with variable income.
• Examples:
  • A self-employed rideshare driver may prefer a SEP for its flexibility (contributions from 0 up to $70,000 in 2025), and for minimal paperwork while balancing work, family, and language classes.
  • A small studio owner with only a spouse as employee might opt for a Solo 401(k) to combine employee deferrals and employer profit‑sharing, enabling catch‑ups and higher totals when income allows.
  • Employers hiring a few community members may use a SIMPLE IRA to encourage team saving—with either a 3% match or 2% nonelective contribution and employee deferrals up to $21,450 in 2024.

Eligibility, Filing, and Deduction Rules

• Contributions to SEP, SIMPLE, and other qualified plans (other than Roth deposits) are generally deducted as an adjustment to income on Schedule 1 (Form 1040). See the IRS page: Schedule 1 (Form 1040).
• SEPs and SIMPLEs avoid annual filings like Form 5500. Details: About Form 5500.
• Setting up a SEP IRA can be as simple as completing <a href="https://www.irs.gov/forms-pubs/about-form-5305-sep">Form 5305-SEP</a> or using an IRS‑approved prototype: About Form 5305-SEP.
• The IRS consolidated guide for self-employed owners is: Retirement Plans for Self-Employed People.

Practical Considerations and Calculations

• The defined contribution rule using 100% of net earnings from self‑employment matters because net earnings are computed after self‑employment tax adjustments—so allowable deposits may be lower than expected.
• Owners can hold more than one qualified plan, but total contributions across all plans must stay within IRS limits; combined deposits must be monitored year to year.
• Solo 401(k) plans are intended for businesses with no employees other than a spouse—hiring staff generally requires switching to a standard 401(k) or other qualified plan.
• The tax credit for starting a plan can cover eligible start‑up costs for up to three years and may soften the cost of moving beyond SEP or SIMPLE.

Common Pitfalls and a Simple Checklist

Common errors that hit immigrant entrepreneurs especially hard:
– Missing the contribution deadline.
– Misreading the compensation base.
– Skipping required employer deposits under a SIMPLE match.

Quick checklist:
1. Choose the plan type.
2. Confirm who is eligible under the plan’s written terms.
3. Set the contribution rate for the year.
4. Deposit by the deadline (tax filing deadline, including extensions, for many plans).
5. Record the deduction on Schedule 1 (Form 1040) and keep bank confirmations and the plan document.

Important operational notes:
– SEP and Solo 401(k) can often be opened and funded by the tax filing deadline for the prior year (including extensions).
– SIMPLE plans require payroll processes for deferrals during the year and timely employer deposits.
– Defined benefit plans require professional help from an actuary and a recordkeeper due to funding complexity.

Key Takeaways and Action Steps

The choice of retirement plan should balance income, team size, and paperwork tolerance—SEPs and SIMPLEs win on low administrative cost, while 401(k) and other qualified plans win on flexibility and potentially higher annual deposits.

• Roth contributions are not deductible; only pre‑tax deposits to SEP, SIMPLE, and qualified plans count toward the Schedule 1 adjustment.
• For many contractors and new Americans, these plans are becoming the primary nest egg, not just a side account.
• Actionable next steps:
  • Choose a plan that matches your business size and cashflow.
  • Confirm eligibility and deadlines.
  • Earmark funds and document the deposit.
  • Consult IRS links above and, if needed, a tax preparer or plan professional.

In a year with $66,000 for 2024 and clear guidance on SEP, SIMPLE, and 401(k) options, the policy message is consistent: choose based on income, team size, and administrative capacity—the right plan supports both immediate deductions and long‑term security for families.