How are self-employment retirement plans taxed?

The freedom of being your own boss also means you have to be in charge of your own retirement savings.
The freedom of being your own boss also means you have to be in charge of your own retirement savings.

Ah, self-employment. A blessing and a curse. A blessing because you're the boss. You can work in your pajamas, take the dogs out when you want to, or even work late at night or early in the morning, or not at all. A curse, because you no longer participate in employer-sponsored health plans, pension plans and retirement plans. You have to provide those things yourself.

Sometimes that's easier said than done. The economic vagaries of being self-employed can cause stress, especially when it comes to retirement planning. According to TD Ameritrade, nearly 70 percent of 10 million self-employed workers (moi, included) are not putting money aside for our golden years. In fact, 28 percent (moi, included) are not saving at all [source: TD Ameritrade]. Don't fret, freelancer. There are options.


A person who works alone (the dogs and cats not withstanding) can open a so-called Simplified Employee Pension IRA (SEP IRA), which allows the self-employed to set aside pretax savings. It works like a typical IRA. I can contribute up to 25 percent of my net self-employment income to a SEP IRA, up to a maximum of $52,000 in 2014 [source: IRS].

If you own a business and are contributing to your employees' SEP, those contributions are not included in their gross income, according to the Internal Revenue Service. That means they don't have to pay taxes on it. The IRS also says, "The most you can deduct on your business's tax return for contributions to your employees' SEP-IRAs is the lesser of your contributions or 25 percent of compensation" [sources: IRS, Hannon].

What's cool is that I don't have set up the account to reap the tax advantages until I file my tax return. If my income turns out to be higher than I expected (fat chance), I can make a weighty contribution that will eat into my tax bill. If my income is less than expected, then I can lower my contribution.

Either way it's all good.

I can also open a Solo 401(k). A Solo 401(k) is pretty much a traditional 401(k) plan. In a solo plan, I, as the owner of a business, can contribute as an employer or employee. As an employee in 2014, I cannot contribute more than $17,500 in a tax year. As an employer, however, my contribution cannot exceed $52,000. If you're age 50 or older, you can add another $5,500. Either way you're contributing a percentage of your pretax dollars into the account, which lowers your taxable income so you pay less in taxes [sources: IRS, IRS and Hannon].

You can also open a Simple IRA, in which you can contribute up to $11,500 of your pretax income. Your contributions are also tax deductible. You don't have to start paying taxes on your investments until you begin withdrawing them when you retire.

Related Articles


  • Hannon, Kerry. "The best Retirement Plans for the Self-Employed." April 4, 2011. [Oct. 10, 2014].
  • Internal Revenue Service. Choosing a Retirement Plan: SEP [Oct. 10, 2014].
  • Internal Revenue Service. Retire Topics—401 (k) and Profit-Sharing Plan Contribution Limits. [Oct. 10, 2014].,-Employee/Retirement-Topics-401k-and-Profit-Sharing-Plan-Contribution-Limits
  • Internal Revenue Service: One Participant 401(k) Plans. [Oct. 10, 2014].
  • Internal Revenue Service. SEP Contribution Limits. [Oct. 10, 2014].,-Employee/SEP-Contribution-Limits-(including-grandfathered-SARSEPs)
  • TD Ameritrade. "You're the Boss – Now Take Charge of Your Retirement." Nov. 26, 2013.