As an entrepreneur, you have decisions to make about how to prepare for your own retirement, as well as determining the most cost-effective and manageable benefit plans for your employees.

Most large companies offer 401k plans that allow employees to sock away money on a tax-deferred basis, which encourages  savings.  At the same time, companies match some of those contributions to stay competitive in the labor market and to retain talent. When you are self-employed, though, you need to implement a different strategy to take advantage of deferred-compensation benefits.

Fear not, there are two options that can be established by a small business owner: SEP (Simplified Employee Pension)-IRA or a SIMPLE (Savings Incentive Match PLan for Employees) IRA.

There are similarities between the SEP and SIMPLE, but key differences determine which one is right for your company. Neither plan requires any kind of IRS reporting, and both are easy to establish and maintain. That's ideal for small business owners who might not have a payroll and benefits department to oversee complicated employee packages.

Let me give you 2 examples:

Barbara, who owns a pizza restaurant, wants to offer a retirement benefit to her 22 employees that would allow her to get a substantial tax deduction while establishing a competitive benefit package for key employees to keep them from  jumping ship to larger corporate establishments.

Ted is a sole proprietor of a tree-trimming business who would like to contribute to his own retirement plan, and offer a tax-deductible fringe benefit for his only employee. His business enjoyed a large increase in gross income and he thought investing in a retirement plan for himself and his employee would be a good idea for his bottom line.

At the end of the strategy session, Barbara chose a SIMPLE plan while Ted went with the SEP for these reasons:

Eligibility, Funding and Contribution Limits

With the SIMPLE IRA, the majority of funding is from employee contributions, but it does have a required employer contribution.  Since Barbara has fewer than 100 employees and does not offer any other qualified plan, her company is eligible to participate in a SIMPLE IRA.

This makes the most sense because she's not taking on the burden of funding the entire plan herself--  the ball is in the employees' court. They can contribute up to $12,500 in 2016 with an additional $3,000 for employees  over 50, thus deferring income and lowering their current year tax liability.

While Barbara will be required to make a contribution to all employees in the plan, she can choose one of two options to cover her part. She can either match employee contributions 100% of first 3% of compensation (and as low as 1% in any 2 out of 5 years); or contribute 2% of each eligible employee's compensation.

The plan must be offered to any employee who makes (or has made) $5,000 in either of the previous two years. This benefits Barbara because, in the restaurant business, she might have employees who are seasonal or part-time to whom she won't be required to offer enrollment in the SIMPLE IRA.

On the other hand, the SEP IRA is entirely funded by the employer and there are no annual funding requirements, so if the business has fluctuating income, the owner of the plan can prioritize expenses as needed.

This SEP IRA plan is open to any business with one or more employees. This option tends to work well for Ted's sole proprietorship, because he is mostly interested in setting himself up to make more contributions to his retirement (up to 25% of his income, but not greater than $53,000 for 2016) than he could a traditional or Roth IRA ($5,500 or $6,500 if he is over 50).

In fact, if he really wanted to, Ted could start a personal IRA in addition to the SEP IRA. Ted can also make fully-deductible contributions to his employee's plan, which is a great fringe benefit to offer his only worker.

SEP or SIMPLE IRA--Which is right for your business?

No matter what type of business you have, you will most likely benefit from starting a SIMPLE IRA or SEP IRA. Not only will it be a deductible expense that will lower your self-employment tax, you can also provide a valuable benefit for your employees and possibly tuck some money away for your own retirement.