How to Calculate SEP Contribution
- 1). Check IRS limits, as they change often. For tax year 2010, the maximum amount you can contribute to a SEP-IRA is the lesser of 25 percent of an employee's compensation or $49,000. However, you cannot consider the amount an employee earns over $245,000 when figuring your contribution amount. For example, if an employee earns $250,000, you can only contribute $49,000 for that employee, even though 25 percent of the employee's earnings would equal $62,500.
- 2). For employers, your maximum contribution amount is 20 percent of your net self-employment earnings. Net self-employment earnings are calculated on Schedule SE, and are generally your net profit from the operation of your business.
- 3). If you are an employer, you are not required to make annual contributions, unlike with some qualified retirement plans, such as money purchase plans. However, if you do contribute on your own behalf, you must contribute the same percentage to each eligible employee as for yourself. For example, if you have a net profit of $100,000, and you contribute $15,000 to your own SEP-IRA, you have contributed 15 percent of your income to your SEP. Therefore, you must also contribute 15 percent of each eligible employee's compensation into their own SEP account. Eligible employees are defined as those over the age of 21, who have worked for you in at least three of the past five years, and who have received compensation from you of at least $550 (for tax year 2010).