 Most of this information comes from the tax guide for small business for individuals who use schedule C publication 3 3 4 tax year 2022 you could find on the irs website irs.gov irs.gov Looking at the income tax formula. We're focused online one income Remembering the first half of the income tax formula is in essence an income statement But just a scaffolding and outline other forms and schedules flowing into these line items One of those being the schedule C having business income minus business expenses The net business income flowing from schedule C to line one income of our income tax formula The first page of the form 1040 remembering the schedule C flows into the schedule one Which flows into the first page of the form 1040 line number eight the profit and losses is the schedule C Profit or loss from business and it's formatted as an income statement in essence having income Section and expense section. We're focused on the expenses at this time Specifically with related relation to pension plans. Okay, so we've got the pension plans You can set up and maintain the following small business retirement plans for yourself and your employees So we've got the SEP. We've got the simple. We've got other qualified plans So note the general thought process often happening for small businesses would be now I have a sole proprietorship type of business if I were an employee One of the big benefits you often get when you're a w2 employee as opposed to a sole proprietor is A 401k plan or something like that the reason that's such a big benefit is because you can put money into a Retirement type of plan and that you have tax benefits related to the retirement plan You also could have some matching involved with it as well Now I do want to point out that oftentimes when people think of these kind of retirement plans They kind of feel like they start to think in imagine of these plans as being Separate or different than ordinary or normal investments. They're like thought of as plans that are like government Constructed retirement plans that we're putting our money into or something like that That's not really what they are or how I would think about them Usually we're putting money into some kind of mutual fund and even if we didn't have any tax Benefits even if we didn't have like a 401k or an IRA or anything like that We would still want to put money away for retirement Using the tools that are are out there these days, which are normally the mutual fund types of tools which allow us to pool money together and Invest in stocks and bonds for retirement. That's the general concept So where does the 401k come into play? Why would we put it under on 401k? Well, the 401k you might think of as kind of like an an umbrella over the top of the normal investment tool of these types of mutual funds general, that's the structure that's going to be used and They actually restrict you the umbrella does the 401k for example from taking the money out early But in exchange for that restriction, they allow you the tax benefit of putting the money in Upfront so you're gonna put the money in whenever we're thinking about these kind of retirement plans similar thing with an IRA we get a deduction When we put the money in or we get a tax benefit when we put the money in and then when we take the money out We usually have to pay taxes at the point in time that we take it take it out So it's kind of like a deferral type of situation So that's the general idea with the 401k similar thing with the IRA if you are not an employee Of an employer that has access to a 401k plan You could put money into an IRA, but the amount of money you can put into an IRA is Much less than it is for like a 401k type of plan So as a sole proprietor you might say well, I'm not getting in I have some cash flow I can't put the money into I want to put more than I can put into say an IRA maybe So then you might think about setting up your own kind of pension plan Normally you wouldn't want to like a 401k plan because that's going to be quite burdensome to Manage a 401k plan for for a small business often times So you might think of some other alternatives for small businesses both for yourself So that you could put more money in as well as for the employees and you have to keep in mind then What are the rules for the plan in terms of how much I can put into the plan? For myself For this plan as the owner of the schedule see small business and what are the rules for the employees? Then I'm required to put in for the employees and then I can put in for the employees Okay, so so instead of having a 401k because that's usually going to be quite complex The two main options for the small a small business is like a sep or a simple So once you've come to the conclusion of saying now I have I Want to put more money in than I have in an IRA and then you can then you can go into the thought process of Looking into a sep or a simple and looking at the pros and cons of those types of plans and possibly other qualified plans That you can look into as well One of the benefits being that you can put more money in then you can from an IRA You can also give some benefit to Employees in that case now the sep by the simple employee pension plan I think also has another benefit to it, which is that You you you might be able to put money in not just simply in the tax year that that for 2022 in other words, you might not have to put the money in in 2022 but possibly could do some planning after the year has ended to see how much money you can put in to to the plan because If you do tax preparation, you might come into the situation that the IRA is often the last question that you might ask Somebody because whether or not they can put money into an IRA might be dependent upon other factors So luckily fortunately the tax code allows us to put money into an IRA if we're allowed to past the due date Or the end of the year past December 31st, 2022 in the tax year 2022 case up until the point in time that we do the tax return is due April 15th or 17th or whatever the tax due date is That allows us to process the tax return and see how much we can maximize the IRA, which is great