SEP and Employer Contributions

• A SEP is set up fairly simply by filing IRS form 5305-SEP, available through the IRS website. While a matching 401(k) or SIMPLE IRA includes employee contributions with what the employer adds, a SEP is maintained only via employer contributions. Therefore, the only way an employee can contribute to a SEP is if the employee is self-employed at his own business.
  
  

Contribution Limits

• The company principal cannot defer a portion of her salary to the SEP. When calculating the deduction for contributions made to your own SEP, compensation is considered net earnings from self-employment. This takes into account the deduction for 50 percent of your self-employment tax and the deduction for contributions to your own SEP. Therefore, a self-employed individual determines the deduction for contributions to her SEP indirectly by reducing the contribution rate. There are deduction limits based on various criteria that can be found in IRS Publication 560.
  
  

Contribution Details

• Contributions to your SEP do not need to be made each year. If other employees are included in the SEP, all participants that worked that year and received at least $500 in compensation must receive an amount in relation to their salaries or compensation arrangements.
  
  

SEP Example

• For example, Bob may own a printing firm with three other employees and works out of his home. He puts a SEP in place and contributes to his employees and himself (as an employee of the business). Every person that is a full-time employee and has earned more than $2,000 per month, for a year will get a $2,000 contribution to his SEP. Any employee that works part time and has earned $500 to $1,999 will get an $800 contribution to his SEP. Since Bob is working full time and earns $3,000 per month salary, he contributes $2,000 to his own SEP.
  
  

Contribution Uses

• The company principal makes the contribution to the SEP by the due date for filing her federal income tax return for the year. If she has filed for and received an extension, her SEP contribution can also be extended. Employees (as well as the principal) can roll over SEP assets to other traditional IRAs such as Roth or other accounts they have. SEP contributions can be put into savings accounts, stocks, mutual funds, money market funds, or other types of investments.