Understanding SEP IRA Contributions
The first thing you need to understand is that a Sep IRA Contribution is treated as part of a profit-sharing plan. The employer can contribute up to 25% of the employee's wages to an employee's SEP-IRA account. This means if an employee earns $30,000 in wages, the employer can contribute up to a maximum of $7,500 to the SEP-IRA account.
The total contribution to an SEP-IRA account can not exceed the lesser of 25% of income (20% for self-employed before self-employed tax deduction is included) or $46,000 for 2008. Contributions can be made to the plan right up until the date that the employer's return is due for that year.
Self-Employed
The contribution limit for self-employed persons is more complicated. It is 18.587045% or approximately 18.6% of net profit. The computation is found in IRS Pub 560, section 5, Table and Worksheets for the Self-Employed. This specifically is the Deduction Worksheet for Self-Employed. There are two issues to consider, FICA tax and Reduced rate . FICA Tax SEP contribution limits are computed from net profit adjusted for the deduction for self-employment tax (2006 Form 1040, line 27, from Schedule SE, Section A, line 6, or Section B, line 13). This is half the 15.3% FICA tax, levied on net earnings, which is 92.35% of net profit. Adjusted net profit (net profit minus deduction for self-employment tax) is 92.935225% of net profit; be aware that adjusted net profit is close to but slightly more than net earnings. Overall The overall Sep IRA Contribution limit is 20% of 92.935225%, which equals 18.587045%, of net profit. It is also important to understand that an Sep IRA Contribution is completely discretionary to the employer. What this means is that every year the employer gets to decide if they will make a Sep IRA Contribution, or not. It also means that each year the employer can adjust the contribution percentage. They can raise the percentage (up to the maximum limit) or lower it to any lesser percentage they choose for that year. The only restriction is that if they do make a contribution the same percentage must be applied to all participating members. They can't make adjustments where they would raise the percentage of only some members.
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