If you own a business and find that you have a balance due on your 2012 tax return, you should consider setting up and making a contribution to a Simplified Employee Pension (SEP). Unlike most pensions that need to be set up before the end of the tax year, SEPs can be established and funded up to the due date of the return, including extensions. This means that if you filed an extension, you have until October 15, 2013 to use a SEP to reduce your 2012 taxes.
For 2012 the maximum deductible contribution is 25 percent of compensation (or Schedule C income) up to $50,000. This increases to $51,000 in 2013. One advantage of SEPs is that contributions are voluntary. This means that you can fund the SEP in good years and skip it in bad years.
SEPs usually work best for companies with no employees or very few employees. This is because the employer will need to make a contribution for all employees age 21 or older who have worked for the company full-time for three out of the previous five years. In 2013, part-time employees and employees who have only worked for the company for part of the year must be covered if they made more than $550 during the year.
Be sure to have your tax advisor calculate your savings if you set up a SEP, and compare this to the required contribution for your employees. Often you can offer a great employee benefit, fund your retirement, and reduce your income taxes at the same time.