updated 3/15/2006 6:01:19 PM ET 2006-03-15T23:01:19

In the waning weeks of the tax filing season, small business owners can still grab hold of a huge deduction by setting up a retirement plan known as a Simplified Employee Pension.

Creating a retirement plan is one of those tasks that many small business owners keep wanting to take care of, but keep putting off. A SEP is a procrastinator’s dream, because the deadline for setting up one of these plans, or making your prior-year contribution to one, is the due date of your tax return — April 17 this year, or, if you’re planning to file for a six-month extension of the filing deadline, Oct. 16. (The usual dates of April 15 and Oct. 15 fall on weekends, so taxpayers get a little extra time to get their returns in).

The payoff of creating a SEP or any other retirement plan is huge. For the 2005 tax year, an employer can deduct up to 25 percent of an employee’s compensation, or up to $42,000.

SEPs have other advantages. Of all the retirement plans, they are the easiest to set up — a bank or other financial institution can help you do it — and they require the least paperwork to maintain. You are not required to file annual reports with the government as you must with what more complicated plans such as 401(k)s or profit-sharing plans — as long as you don’t also have one of those plans as well.

Perhaps the only easier route for a retirement plan is the Individual Retirement Account, said Robert Pesce, a certified public accountant with Marcum & Kliegman LLP in New York. But the tax breaks are much better with a SEP.

“It’s done in two seconds,” he said of the SEP. “It’s a great way to get started.”

If you’ve been thinking about setting up another plan, for example, a 401(k), you can still go ahead and do that after having created a SEP. But you’re limited in how much you contribute to all the plans; your total 2005 contributions for any employee cannot exceed 25 percent of their compensation or $42,000. That amount will rise for 2006.

You can find information about the various retirement plan options on the IRS Web site. The agency has an Online Resource Guide with details about SEPs and some of the other popular plans.

Other resources include IRS Publication 560, Retirement Plans for Small Business, downloadable from the IRS site, and the Department of Labor site, too. There, you’ll also find information on the types of plans and your responsibilities, such as annual paperwork requirements, for each.

Setting up a SEP involves complying with the instructions that accompany a very short IRS form, 5305-SEP, which mostly means setting up accounts for your participating employees and giving them disclosure documents that your bank should provide. You need to complete Form 5305-SEP and also give copies of that to your employees. In most cases, you don’t file the form with the IRS. But be aware that if you have another plan such as a 401(k), you cannot use Form 5305-SEP.

The SEP is of course just one of the retirement plan options available, and a savvy business owner will consider whether he or she should be continuing to fund a SEP or move on to another type of plan. With the year nearly a-third over, and retirement planning often not a priority, owners thinking of plans such as SIMPLEs, 401(k)s and profit-sharing plans need to start working on them soon.

“You’ve got to be thinking about 2006 now,” Pesce said.

The SIMPLE, or Savings Incentive Match Plans for Employees, is a plan for companies with 100 or fewer employees. It can be set up like an Individual Retirement or a 401(k), and provides for employers to match employee contributions. It has more paperwork than a SEP, but far less than what are called the qualified plans, such as profit-sharing plans, defined benefit plans and money purchase plans.

The deadline for the SIMPLE is the tightest of all the plans; it has to be set up between Jan. 1 and Oct. 1, although a company that comes into existence after Oct. 1 can still set one up by the end of the year.

You’ve got a little more time with the more complicated plans, until the end of the year, but you’ll need that time — and to get help from a benefits expert, who can help you decide how to structure the plan, and from your accountant or other tax professional.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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