Publication 590 |
2001 Tax Year |
How Much Can Be Contributed on My Behalf?
The SEP rules permit an employer to contribute to each participating employee's SEP-IRA up to 15% of the employee's compensation or $35,000 for
2001 ($40,000 for 2002), whichever is less. Because only the first $170,000 for 2001 ($200,000 for 2002) of compensation is usually
considered, the limit is actually the lesser of 15% of compensation or $25,500 for 2001 ($30,000 for 2002). These contributions are funded by the
employer.
An employer who signs a SEP agreement does not have to make any contribution to the SEP-IRAs that are set up. But, if the employer does make
contributions, the contributions must be based on a written allocation formula and must not discriminate in favor of highly compensated employees
(defined in Publication 560).
Figuring the 15% Limit
For purposes of determining the 15% limit, compensation is generally limited to $170,000 for 2001 ($200,000 for 2002), not including your
employer's contribution to your SEP-IRA.
Example.
Barry's nonunion employer has a SEP for its employees. Barry's compensation for 2001, before his employer's contribution to his SEP-IRA, was
$180,000. Because the 15% limit is less than the $35,000 limit, Barry's employer can contribute up to $25,500 (15% × $170,000) 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 these contributions.
Determining your compensation.
For purposes of 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 contributions to your own SEP-IRA.
Because your deduction amount and your net earnings amount are each dependent on the other, this adjustment presents a problem.
To solve this problem, you must use a reduced contribution rate to figure your maximum deduction. Use the following worksheets to find this reduced
contribution rate and your maximum deduction. Make no reduction to the contribution rate for any common-law employees.
Worksheet 3-1. Self-Employed Person's Reduced Contribution Rate
1) |
Plan contribution rate as a decimal (for example, 10 1/2% would be 0.105) |
|
2) |
Rate in line 1 plus one (for example, 0.105 plus one would be 1.105) |
|
3) |
Reduced contribution rate as a decimal. (Divide line 1 by line 2.) |
|
Worksheet 3-2. Self-Employed Person's Maximum Deductible Contribution
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 4
Enter your rate from the Self-Employed
Person's Reduced Contribution Rate
Worksheet |
|
Step 5
Multiply Step 3 by Step 4 and enter the
result |
$ |
Step 6
Multiply $170,000 for 2001 ($200,000 for
2002) by your plan contribution rate. Enter
the result but not more than $35,000 for
2001 ($40,000 for 2002) |
$ |
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 your plan provide that you contribute 10 1/2% (.105) of your compensation,
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-law employees' compensation of $100,000 and contributions for them of $10,500 (10 1/2% x $100,000).
This net earnings amount is now reduced to $192,337 by subtracting your self-employment tax deduction of $7,663. You figure your reduced contribution
rate and maximum deductible contributions as shown on Filled-in Worksheet 3-1 and Filled-in Worksheet 3-2.
Filled-in Worksheet 3-1. Example of Self-Employed Person's Reduced Contribution Rate
1) |
Plan contribution rate as a decimal (for example, 10 1/2% would be 0.105) |
0.105 |
2) |
Rate in line 1 plus one, (for example, 0.105 plus one would be 1.105) |
1.105 |
3) |
Reduced contribution rate as a decimal. (Divide line 1 by line 2.) |
0.095 |
Filled-in Worksheet 3-2. Example of Self-Employed Person's Maximum Deductible Contribution
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 |
$ 7,663 |
Step 3
Subtract Step 2 from Step 1 and enter
the result |
$192,337 |
Step 4
Enter your rate from the Self-Employed
Person's Reduced Contribution Rate
Worksheet |
0.095 |
Step 5
Multiply Step 3 by Step 4 and enter the
result |
$ 18,272 |
Step 6
Multiply $170,000 for 2001 ($200,000 for
2002) by your plan contribution rate.
Enter the result but not more than
$35,000 for 2001 ($40,000 for 2002) |
$ 17,850 |
Step 7
Enter the smaller of Step 5 or Step 6.
This is your maximum deductible
contribution |
$ 17,850 |
Net earnings from self-employment.
For SEP purposes, your net earnings are your gross income from your business minus allowable deductions for that business. Allowable deductions
include contributions to your employees' SEP-IRAs. You also take into account the deduction allowed for one-half of your self-employment tax, and the
deduction for contributions to your own SEP-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 partnership income or loss (other than separately treated items such as capital gains and
losses).
- If you are a limited partner, guaranteed payments for services to or for the partnership.
- Elective contributions or deferrals under any of the following plans.
- 401(k) plans.
- 403(b) plans (tax-sheltered annuities).
- SEP plans (salary reduction arrangements).
- Savings incentive match plans for employees (SIMPLE plans).
- Cafeteria plans.
- 457 plans (plans of state and local governments and certain tax-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 or loss.
Time Limit for Contributions
To deduct contributions for a year, the employer must make the contributions by the due date (including extensions) of the employer's return for
the year.
Overall Limit--Employer With
Defined Contribution and SEP Plans
If an employer contributes to a defined contribution retirement plan (a plan under which an individual account is set up for each participant),
annual additions to an account are limited to the lesser of (1) $35,000 for 2001 ($40,000 for 2002) or (2) 25% of the participant's compensation.
Moreover, for purposes of these limits, contributions to more than one such plan must be added. Since a SEP is considered a defined contribution plan
for purposes of these limits, employer contributions to a SEP must be added to other contributions to defined contribution plans.
Are My Employer's Contributions Taxable?
Your employer's contributions to your SEP-IRA are excluded from your income rather than deducted from it. This means that, unless there are excess
contributions, you do not include any contributions in your gross income; nor do you deduct any of them.
Your employer's contributions to your SEP-IRA should not be included in your wages on your Form W-2 unless there are contributions under a
salary reduction arrangement (explained later).
Excess employer contributions.
If your employer contributes more than is allowed, you must include the excess in your gross income, without any offsetting deduction.
Excess employer contributions you withdraw before your return is due.
If your employer contributes more to your SEP-IRA than 15% of your compensation or $35,000 for 2001 ($40,000 for 2002), whichever is less, you will
not have to pay the 6% tax (discussed in chapter 1 under Excess Contributions) on it if you withdraw this excess amount (and any interest
or other income earned on it) from your SEP-IRA before the date for filing your tax return, including extensions. However, you may have to pay an
additional 10% tax (discussed in chapter 1 under Early Distributions) on the early distribution of the interest or other income earned on
the excess contribution.
Excess employer contributions you withdraw after your return is due.
If employer contributions for the year are $35,000 for 2001 ($40,000 for 2002) or less, you can withdraw any excess employer contributions from
your SEP-IRA after the due date for filing your tax return, including extensions, free of the 10% tax on early distributions, discussed earlier.
However, the excess contribution is subject to the annual 6% excise tax. Also, you may have to pay the additional 10% tax on the early distribution of
interest 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 employer SEP contributions. You can deduct them the same way as contributions to a
regular IRA. However, your deduction may be reduced or eliminated because, as a participant in a SEP, you are covered by an employer retirement plan.
See How Much Can I Deduct? in chapter 1.
Excess contributions you make.
For information on excess contributions you make to your SEP-IRA independent of employer SEP contributions, see What Acts Result in
Penalties? in chapter 1.
Self-employed individuals.
If you are self-employed (a sole proprietor or partner) and have a SEP plan, take your deduction for employer contributions to your own SEP-IRA on
line 29, Form 1040. If you also make deductible contributions to your SEP-IRA (or any other IRA you own) independent of your employer contributions,
take your deduction on line 23, Form 1040.
For more employer information on SEP-IRAs, get Publication 560.
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