Publication 560 - Retirement Plans For Small Business

the financial institution where the SEP-IRA is

Annual compensation limit. You cannot

Deduction Limit for

maintained.

consider the part of an employee’s compensa-

Self-Employed Individuals

tion over $170,000 when figuring your contribu-

Deadline for setting up a SEP. You can set

tion limit for that employee. Therefore, $25,500

If you contribute to your own SEP-IRA, you must

up a SEP for a year as late as the due date

is the maximum contribution for an eligible em-

make a special computation to figure your maxi-

(including extensions) of your income tax return

ployee whose compensation is $170,000 or

mum deduction for these contributions. When

for that year.

more. (The annual compensation limit increases

figuring the deduction for contributions made to

to $200,000 for 2002.)

your own SEP-IRA, compensation is your net

earnings from self-employment (defined in

More than one plan. If you contribute to a

chapter 1), which takes into account both the

How Much

defined contribution plan (defined in chapter 4),

following deductions.

annual additions to an account are limited to the

•

Can I Contribute?

lesser of $35,000 or 25% of the participant’s

The deduction for one-half of your self-em-

compensation. (For 2002, annual additions are

ployment tax.

limited to the lesser of $40,000 or 100% of the

•

The SEP rules permit you to contribute a limited

The deduction for contributions to your

participant’s compensation.) When you figure

amount of money each year to each employee’s

own SEP-IRA.

this limit, you must add your contributions to all

SEP-IRA. If you are self-employed, you can con-

defined contribution plans. Because a SEP is

tribute to your own SEP-IRA. Contributions must

The deduction for contributions to your own

considered a defined contribution plan for this

be in the form of money (cash, check, or money

SEP-IRA and your net earnings depend on each

limit, your contributions to a SEP must be added

order). You cannot contribute property. How-

other. For this reason, you determine the deduc-

to your contributions to other defined contribu-

ever, participants may be able to transfer or roll

tion for contributions to your own SEP-IRA indi-

tion plans.

over certain property from one retirement plan to

rectly by reducing the contribution rate called for

another. See Publication 590 for more informa-

Tax treatment of excess contributions. Ex-

in your plan. To do this, use the Rate Table for

tion about rollovers.

cess contributions are your contributions to an

Self-Employed or the Rate Worksheet for

You do not have to make contributions every

employee’s SEP-IRA (or to your own SEP-IRA)

Self-Employed, whichever is appropriate for

year. But if you make contributions, they must be

for 2001 that exceed the lesser of the following

your plan’s contribution rate, in chapter 5. Then

based on a written allocation formula and must

amounts.

figure your maximum deduction by using the

not discriminate in favor of highly compensated

Deduction Worksheet for Self-Employed in

•

15% of the employee’s compensation (or,

employees (defined in chapter 1). When you

chapter 5.

for you, 13.0435% of your net earnings

contribute, you must contribute to the SEP-IRAs

from self-employment).

of all participants who actually performed per-

Deduction Limits

•

sonal services during the year for which the

$35,000 ($40,000 for 2002).

for Multiple Plans

contributions are made, even employees who

Excess contributions are included in the

die or terminate employment before the contri-

For the deduction limits, treat all your qualified

employee’s income for the year and are treated

butions are made.

defined contribution plans as a single plan and

as contributions by the employee to his or her

The contributions you make under a SEP are

all your qualified defined benefit plans as a sin-

SEP-IRA. For more information on employee tax

treated as if made to a qualified pension, stock

gle plan. See Kinds of Plans in chapter 4 for the

treatment of excess contributions, see chapter 4

bonus, profit-sharing, or annuity plan. Conse-

definitions of defined contribution plans and de-

in Publication 590.

quently, contributions are deductible within lim-

fined benefit plans. If you have both kinds of

its, as discussed later, and generally are not

plans, a SEP is treated as a separate profit-shar-

Reporting on Form W – 2. Do not include

taxable to the plan participants.

ing (defined contribution) plan. A qualified plan

SEP contributions on your employee’s Form

A SEP-IRA cannot be designated as a Roth

is a plan that meets the requirements discussed

W – 2 unless contributions were made under a

IRA. Employer contributions to a SEP-IRA will

under Qualification Rules in chapter 4. For infor-

salary reduction arrangement (discussed later).

not affect the amount an individual can contrib-

mation about the special deduction limits, see

ute to a Roth IRA.

Deduction limit for multiple plans under Em-

ployer Deduction in chapter 4.

Time limit for making contributions. To de-

Deducting

duct contributions for a year, you must make the

SEP and profit-sharing plan. If you also con-

contributions by the due date (including exten-

Contributions

tribute to a qualified profit-sharing plan, you

sions) of your tax return for the year.

must reduce the 15% deduction limit for that

profit-sharing plan by the allowable deduction

Generally, you can deduct the contributions you

Contribution Limits

for contributions to the SEP-IRAs of those par-

make each year to each employee’s SEP-IRA. If

ticipating in both the SEP plan and the

you are self-employed, you can deduct the con-

Contributions you make for 2001 to a

profit-sharing plan.

tributions you make each year to your own

common-law employee’s SEP-IRA cannot ex-

SEP-IRA.

Carryover of

ceed the lesser of 15% of the employee’s com-

pensation or $35,000 ($40,000 for 2002).

Excess SEP Contributions

Deduction Limit for

Compensation generally does not include your

Contributions for

contributions to the SEP. However, if you have a

If you made SEP contributions that are more

salary reduction arrangement, see Employee

Participants

than the deduction limit (nondeductible contribu-

compensation under Salary Reduction Simpli-

tions), you can carry over and deduct the differ-

fied Employee Pension (SARSEP), later.

The most you can deduct for your contributions

ence in later years. However, the carryover,

for participants is the lesser of the following

when combined with the contribution for the later

Example. Your employee, Mary Plant,

amounts.

year, is subject to the deduction limit for that

earned $21,000 for 2001. The maximum contri-

year. If you also contributed to a defined benefit

1) Your contributions (including any elective

bution you can make to her SEP-IRA is $3,150

plan or defined contribution plan, see Carryover

deferrals and excess contributions

(15% x $21,000).

of Excess Contributions under Employer Deduc-

carryover).

tion in chapter 4 for the carryover limit.

Contributions for yourself. The annual limits

2) 15% of the compensation (limited to

on your contributions to a common-law

Excise tax. If you made nondeductible (ex-

$170,000 per participant) paid to them dur-

employee’s SEP-IRA also apply to contributions

cess) contributions to a SEP, you may be sub-

ing 2001 from the business that has the

you make to your own SEP-IRA. However, spe-

ject to a 10% excise tax. For information about

plan.

cial rules apply when figuring your maximum

the excise tax, see Excise Tax for Nondeduct-

deductible contribution. See Deduction Limit for

For 2002, the amount in (2) is 25% of compen-

ible (Excess) Contributions under Employer De-

Self-Employed Individuals, later.

sation (limited to $200,000 per participant).

duction in chapter 4.

Chapter 2 Simplified Employee Pension (SEP)

Page 7

Publication 560 - Retirement Plans For Small Business - 2001 Page 7

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