How Much Can Be Contributed on My Behalf? The SEP rules permit an employer to contribute (and deduct) eachyear to each participating employee's SEP-IRA up to 15% of theemployee's compensation or $30,000, whichever is less. Thesecontributions are funded by the employer. An employer who signs a SEP agreement does not have to make anycontribution to the SEP-IRAs that are set up. But, if the employerdoes make contributions, the contributions must be based on a writtenallocation formula and must not discriminate in favor of highlycompensated employees (defined in Publication 560). Figuring the 15% Limit For purposes of determining the 15% limit, compensation isgenerally limited to $160,000, not including your employer'scontribution to your SEP-IRA. Example.Barry's nonunion employer has a SEP for its employees. Barry'scompensation for 1999, before his employer's contribution to hisSEP-IRA, was $180,000. Barry's employer can contribute up to $24,000(15% $160,000) to Barry's SEP-IRA. Deduction Limit for a Self-Employed Person If you are self-employed and contribute to your own SEP-IRA,special rules apply when figuring your maximum deduction for thesecontributions. Compensation for the self-employed.For determining the 15% limit on contributions, discussed above,your compensation is your net earnings from self-employment,defined later. Note that, for SEP purposes, your net earnings(compensation) must take into account your deduction for contributionsto your own SEP-IRA. Because your deduction amount and your netearnings amount are each dependent on the other, this adjustmentpresents a problem. Pencil: To solve this problem, you make the adjustment to net earningsindirectly by, in figuring your maximum deduction, reducing thecontribution rate called for in the plan. Use the following worksheetsto find this reduced contribution rate and your maximum deduction.Make no reduction to the contribution rate for any common-lawemployees. Self-Employed Person's Rate Worksheet 1) Plan contribution rate as a decimal (forexample, 10 1/2% would be 0.105)            2) Rate in line 1 plus one (for example, 0.105plus one would be 1.105)            3) Self-employed rate as a decimal (divide line 1by line 2)            Self-Employed Person's Deduction Worksheet Step 1  Enter your net earnings from line 3, Schedule C-EZ  (Form 1040), line 31, Schedule C (Form 1040), line  36, Schedule F (Form 1040), or line 15a, Schedule  K-1 (Form 1065) plus any elective contributions or  deferrals described under Net earnings from  self-employment, later $          Step 2  Enter your deduction for self-employment tax from  line 27, Form 1040 $          Step 3  Subtract Step 2 from Step 1 and enter the result $          Step 4cheap hotel in Bremen  Enter your rate from the Self-Employed Person's Rate  Worksheet            Step 5  Multiply Step 3 by Step 4 and enter the result $          Step 6  Multiply $160,000 by your plan contribution rate.  Enter the result but not more than $30,000 $          Step 7  Enter the smaller of Step 5 or Step 6. This is your  maximum deductible contribution. $          Example.You are a sole proprietor and have employees. The terms of yourplan provide that you contribute 10 1/2% (.105) of yourcompensation, and 10 1/2% of your common-law employees'compensation. Your net earnings from line 31, Schedule C (Form 1040)is $200,000. In figuring this amount, you deducted your common-lawemployees' compensation of $100,000 and contributions for them of$10,500 (10 1/2% x $100,000). This net earnings amount isnow reduced to $193,267 by subtracting your self-employment taxdeduction of $6,733. You figure your self-employed rate and maximumdeduction for employer contributions on behalf of yourself as follows: Self-Employed Person's Rate Worksheet 1) Plan contribution rate as a decimal (forexample, 10 1/2% would be 0.105)      0.105 2) Rate in line 1 plus one, (for example, 0.105plus one would be 1.105)      1.105 3) Self-employed rate as a decimal (divide line 1by line 2)      0.095 Self-Employed Person's Deduction Worksheet Step 1  Enter your net earnings from line 3, Schedule C-EZ  (Form 1040), line 31, Schedule C (Form 1040), line  36, Schedule F (Form 1040), or line 15a, Schedule  K-1 (Form 1065) plus any elective contributions or  deferrals described under Net earnings from  self-employment, later  $ 200,000 Step 2  Enter your deduction for self-employment tax from  line 27, Form 1040 $   6,733 Step 3  Subtract Step 2 from Step 1 and enter the result  $ 193,267 Step 4  Enter your rate from the Self-Employed Person's Rate  Worksheet      0.095 Step 5  Multiply Step 3 by Step 4 and enter the result $  18,360 Step 6  Multiply $160,000 by your plan contribution rate.  Enter the result but not more than $30,000 $  16,800 Step 7  Enter the smaller of Step 5 or Step 6. This is your  maximum deductible contribution. $  16,800 Net earnings from self-employment.For SEP purposes, your net earnings are your gross income from yourbusiness minus allowable deductions for that business. Allowabledeductions include contributions to your employees' SEP-IRAs. You alsotake into account the deduction allowed for one-half of yourself-employment tax, and the deduction for contributions to your ownSEP-IRA. What to include.Include the following items in your net earnings. Foreign earned income and housing cost amounts. If you are a partner, your distributive share of partnershipincome or loss (other than separately treated items such as capitalgains and losses). If you are a limited partner, guaranteed payments forservices to or for the partnership. Elective contributions or deferrals under any of thefollowing plans. 401(k) plans. 403(b) plans (tax-sheltered annuities). SEP plans (salary reduction arrangements). Savings incentive match plans for employees (SIMPLEplans) Cafeteria plans. 457 plans (plans of state and local governments and certaintax-exempt organizations). What not to include.Do not include the following items in your net earnings. Tax-free items (or deductions related to them). If you are a limited partner, distributions of income orloss. Time Limit for Contributions To deduct contributions for a year, the employer must make thecontributions by the due date (including extensions) of the employer'sreturn for the year. Overall Limit--Employer With Defined Contribution andSEP Plans If an employer contributes to a defined contribution retirementplan (a plan under which an individual account is set up for eachparticipant), annual additions to an account are limited to the lesserof (1) $30,000 or (2) 25% of the participant's compensation. Moreover,for purposes of these limits, contributions to more than one such planmust be added. Since a SEP is considered a defined contribution planfor purposes of these limits, employer contributions to a SEP must beadded to other contributions to defined contribution plans. Are My Employer's Contributions Taxable? Your employer's contributions to your SEP-IRA are excluded fromyour income rather than deducted from it. Your employer'scontributions to your SEP-IRA should not be included in your wages onyour Form W-2, Wage and Tax Statement, unless thereare contributions under a salary reduction arrangement (explainedlater). Unless there are excess contributions, you do not include anycontributions in your gross income; nor do you deduct any of them. Excess employer contributions.If your employer contributes more than is allowed, you must includethe excess in your gross income, without any offsetting deduction. Excess employer contributions you withdraw before your returnis due.If your employer contributes more to your SEP-IRA than 15% of yourcompensation or $30,000, whichever is less, you will not have to paythe 6% tax (discussed in chapter 1under ExcessContributions) on it if you withdraw this excess amount (and anyinterest or other income earned on it) from your SEP-IRA before thedate for filing your tax return, including extensions. However, youmay have to pay an additional 10% tax (discussed in chapter 1underPremature Distributions (Early Withdrawals)) on the earlywithdrawal of the interest or other income earned on the excesscontribution. Excess employer contributions you withdraw after your returnis due.If employer contributions for the year are $30,000 or less, you canwithdraw any excess employer contributions from your SEP-IRA after thedue date for filing your tax return, including extensions, free of the10% tax on premature distributions, discussed earlier. However, theexcess contribution is subject to the annual 6% excise tax. Also, youmay have to pay the additional 10% tax on the early withdrawal ofinterest or other income earned on the excess contribution. Can I Contribute to My SEP-IRA? You can make contributions to your SEP-IRA independent of employerSEP contributions. You can deduct them the same way as contributionsto a regular IRA. However, your deduction may be reduced or eliminatedbecause, as a participant in a SEP, you are covered by an employerretirement plan. See How Much Can I Deduct? in chapter 1. Excess contributions you make.For information on excess contributions you make to your SEP-IRAindependent of employer SEP contributions, see What Acts Resultin Penalties? in chapter 1. Self-employed individuals.If you are self-employed (a sole proprietor or partner) and have aSEP plan, take your deduction for employer contributions to your ownSEP-IRA on line 29, Form 1040. If you also make deductiblecontributions to your SEP-IRA (or any other IRA you own) independentof your employer contributions, take your deduction on line 23, Form1040. For more employer information on SEP-IRAs, get Publication 560.