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taxmap/pubs/p560-003.htm#TXMP623ac193 How Much  Can I Contribute?(p6)

The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. If you are self-employed, you can contribute to your own SEP-IRA. Contributions must be in the form of money (cash, check, or money order). You cannot contribute property. However, participants may be able to transfer or roll over certain property from one retirement plan to another. See Pub. 590 for more information about rollovers.

You do not have to make contributions every year. But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, even employees who die or terminate employment before the contributions are made.

The contributions you make under a SEP are treated as if made to a qualified pension, stock bonus, profit-sharing, or annuity plan. Consequently, contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants.

A SEP-IRA cannot be designated as a Roth IRA. Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth IRA.

taxmap/pubs/p560-003.htm#TXMP5db5228c Time limit for making contributions.(p6)

To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year.

taxmap/pubs/p560-003.htm#TXMP18d8cf6b Contribution Limits(p6)

Contribution Limits

Contributions you make for 2007 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $45,000 ($46,000 for 2008). Compensation generally does not include your contributions to the SEP.

taxmap/pubs/p560-003.htm#TXMP44a75150
Example.(p6)

Your employee, Mary Plant, earned $21,000 for 2007. The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000).

taxmap/pubs/p560-003.htm#TXMP5fc3c015 Contributions for yourself.(p6)

The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. However, special rules apply when figuring your maximum deductible contribution. See Deduction Limit for Self-Employed Individuals, later.

taxmap/pubs/p560-003.htm#TXMP618d17f7 Annual compensation limit.(p6)

You cannot consider the part of an employee's compensation over $225,000 when figuring your contribution limit for that employee. However, $45,000 is the maximum contribution for an eligible employee. The annual compensation limit of $225,000 increases to $230,000 for 2008.

taxmap/pubs/p560-003.htm#TXMP4c292c0c More than one plan.(p6)

If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $45,000 ($46,000 for 2008) or 100% of the participant's compensation. When you figure this limit, you must add your contributions to all defined contribution plans. Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans.

taxmap/pubs/p560-003.htm#TXMP273e402f Tax treatment of excess contributions.(p6)

Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2007 that exceed the lesser of the following amounts.

• 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment).
• $45,000.

Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. For more information on employee tax treatment of excess contributions, see chapter 1 in Pub. 590.

taxmap/pubs/p560-003.htm#TXMP4cab7bcf Reporting on Form W-2.(p6)

Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later).

Previous Page:  Publication 560 - Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans) - Simplified Employee Pension (SEP) Next Page:  Publication 560 - Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans) - Deducting Contributions Use   to find additional occurrences of topic items.