Sep? Simple? Traditional?

[Possi]

I am not understanding the benefit of Self Employment retirement plans, folks.

My client made $15654.00 as a hairdresser. Her financial planner opened a SEP for $4000.

My tax program said she was limited to 25% of net profit after 50% SE Tax deduction, which is only $2910. (TTB says only 20%!)

There is no real benefit here that I see. Nothing is deducted off the Sch C. The amount is limited that she can put in... Why even have one?

The SIMPLE will allow the $4000.00 but so will a Traditional.

So, how does the SEP or SIMPLE especially help this self employed person? Am I missing something? Is there a way to double dip off the Sch C and I'm missing a deduction?

[Bucky]

If she can only take $2916 you will need her to either pull out the difference or move the difference to 2009. She could possibly do $5000 or $6000 to a traditional IRA depending on age , filing status etc. You don't say whether she is married etc. Some advatages of a SEP is you can start and fund after the tax year ends up until October 15 if you extend the return. It works well for higher income self employed with no employees or spouse as employee. I agree in this case I would max out on the traditional and then a SEP if she qualifies for IRA.

[JG EA]

I
My tax program said she was limited to 25% of net profit after 50% SE Tax deduction, which is only $2910. (TTB says only 20%!)

The rate is 25% divided by [.25 plus 1 = 1.25] =.20 or 20%.

So it is at a 25% rate with a calculation for self employment. So even less allowed.