NON-EMPLOYER BUSINESSES, IN WHICH THE PRO-prietor is the only employee, are booming in Colorado. But going it solo, whether by choice or the happenstance of being laid off, need not mean foregoing tax-effective ways to save for retirement.
Colorado's non-employer businesses rose 4.4 percent in 1999 to 325,432, the third highest increase in the COUNTRY, ACCORDING TO THE MOST recent data released by the U.S. Census Bureau. They also generated $13.3 billion in revenue that year.
"We are seeing more people going into business for themselves, especially in the mountain markets. There are a lot of people taking early retirement from large corporations and setting up consultant services," says Darrel Mattivi, vice president and senior trust officer with Wells Fargo Bank in Grand Junction.
Leaving the corporate umbrella means giving up benefits like 401(k) retirement savings accounts that reduce your taxable income. That means, as a sole proprietor, it's up to you, as president, chief executive officer and chairman of New Venture Inc., to think about a retirement plan early in the year.
"The big disadvantage is when people don't fund year-round. Then when tax time comes they have trouble funding the plan fully," says Durango Certified Public Accountant Sandy Elliott, a partner in the firm FrederickZincElliott.
While Internal Revenue Service rules take a bit of careful reading and usually the help of an accountant to understand, they are worth exploring. The primary defined contribution plans for the self-employed are known as SEPs or SIMPLE IRAs. They are just some of the options that have been improved for the 2002 tax year, and can help shelter profits from being taxed in the year they are earned.
Elliott says the Simplified Employee Pension (SEP) is probably the best for the sole proprietor as it allows a greater amount of income to be sheltered from taxes. SIMPLE plans -- both IRA and 401(k) -- are better for small businesses with more than one employee. They allow the owner to shelter a portion of his or her own compensation, while setting a limit to the amount that must be provided in matching funds for every employee.
Both SEPs and SIMPLEs are easy to manage, have no built-in administrative costs and give almost as much benefit as corporate 401Ks. With contribution limits rising, "they're only getting better," Elliott says.
A SEP allowed as much as 15 percent of compensation (or net profit) up to $35,000, to be sheltered from 2001 taxes...