The Best Tax Break Kansas City Freelancers Ignore: Retirement Plans
When self-employed clients ask me how to lower their tax bill, the answer that gets the least attention is often the biggest: put money into your own retirement plan. Every dollar you contribute to a SEP IRA or Solo 401(k) can reduce your federal income tax, and because Missouri and Kansas both start from federal adjusted gross income, it lowers your state tax too.
Why it works so well for freelancers
No employer is offering you a 401(k) match, so you have to build your own plan.
Contribution limits for self-employed plans are far higher than a regular IRA.
Lumpy income? You can decide how much to contribute after you see how the year went.
Quick comparison
SEP IRA: easy to open, can be funded up to your filing deadline (including extensions), roughly 20% of net self-employment earnings.
Solo 401(k): a little more paperwork, but you can contribute as both employee and employer, which usually means more room at moderate incomes. Best opened before December 31.
I walk through a full side-by-side example in SEP IRA vs. Solo 401(k).
A Kansas City example
A Brookside photographer with $70,000 of profit who puts $12,000 into a SEP IRA reduces taxable income by $12,000. Depending on her bracket, that can mean well over $2,000 less in combined federal and Missouri income tax this year, and $12,000 more working for her future.
Do this before December 31
Estimate your profit for the year (my KC self-employed checklist helps).
Decide between a SEP and a Solo 401(k).
If you want a Solo 401(k) for this year, open it now.
Keep enough cash for your January estimated payment.
General information, not tax or investment advice for your specific situation.
About the author
Robert Allen Bautista is a Kansas City tax preparer and accountant. He spent four years at PwC in IT audit and tax, served as Chief Accountant at a CPA firm, holds an M.S. in Accounting, and is a CPA candidate. He has worked with 350-plus individual and small business clients and writes plain-English tax guides in English and Spanish.
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