SEP IRA
(Simplified Employee Pension Plan)
Estimating Contributions for your SEP IRA Plan.
It is important to note, when estimating contributions for a SEP IRA, the calculation method is different for an incorporated business
versus a self-employed business.
Step 1: If you are self-employed…
If you earn only self-employed income, or your business is not incorporated, this worksheet will help
you calculate your annual contribution to your SEP IRA. If you are contributing for employees,
complete Step 2 before going to Step 3.
You will need your income tax forms
Example Yourself
(particularly IRS Form 1040 and either 1. Net business profits
Schedule C, Schedule C-EZ or Schedule K-1)
(From Schedule C, C-EZ or K-1) $50,000
when using this worksheet. SEP IRA 2. Self-employment tax
contributions are currently limited to no (Multiply line 1 by 15.3%) $7,650
more than 25% of compensation, up to
3. Deduction for self-employment tax
*
$45,000 for 2007. (Multiply line 2 by 50%) ($3,825)
This worksheet is intended as a guide only 4. Adjusted net business profits
for estimating the contribution to a SEP IRA (Subtract line 3 from line 1) $46,175
Plan. Please consult with your tax advisor 5. Contribution percentage (Expressed as a decimal)
for further assistance. (Desired contribution as a percentage of earned
income, 0-25%, which can vary each year) 0.25
6. Contribution factor
(Add 1.00 to line 5) 1.25
7. Adjusted earned income
(Divide line 4 by line 6) $36,940
8. Maximum earned income* $225,000 $225,000
9. Final earned income
(The lesser of line 7 and line 8) $36,940
10. Total contribution to your account
(Multiply line 5 by line 9) $9,235
OR Step 1a: If your business is incorporated...
Multiply the percentage of compensation you wish to contribute by the W-2 wages for yourself.
Be sure to complete Step 2 if you have employees.
11. Your W-2 wages $120,000
12. Contribution percentage 0.25
13. Total contribution to your account
(Multiply line 11 by line 12) $30,000
*Maximum compensation on which employer contributions can be based is currently $225,000 and is adjusted periodically for cost of living.
Step 2: Add your employees (if applicable).
These worksheets are for illustrative purposes
Example Yourself only and reflect actual contribution dollars only.
14. Employees’ total wages They do not incorporate any cost associated
(Multiply number of employees by average annual salary) $125,000 with maintaining or setting up an IRA, which
is generally $10-$25 per year. Maintenance
15. Total contribution to employees’ accounts fees are generally paid by the individual
(Multiply line 5 or 12 [if incorporated] by line 14) $31,250 account holder.
Step 3: The real cost of a SEP IRA
may be less than you think.
16. Total employer and employee contributions
(Sum of lines 10 & 15 or 13 &15 )
$40,485
17. Business tax bracket 30%
18. Business tax savings
(Multiply line 16 by line 17) $12,146
19. Net cost to business
(Line 16 minus line 18) $28,339
20. Less contribution to owner’s SEP IRA
(Line 10 or line 13) $9,235
Net cost of contribution
to employees after tax savings
and owner’s contribution
(Line 19 minus line 20) $19,104
Here are three convenient ways to verify Employers who need help
payroll records for W-2 reporting purposes: with a wage reporting question
can call the Social Security
• Phone Verification: To verify employee names and SSNs, call the service center Administration’s (SSA’s)
at 1.800.772.6270.
Employer Reporting Service
Center toll-free at 1.800.772.6270.
• Local Social Security Offices: Contact your nearest Social Security office to verify
up to 50 employee names and SSNs. SSA’s wage reporting specialists
stationed in cities around the
• Large Volume Requests: Files larger than 50 names and SSNs may be submitted country are experts in paper,
on paper listings, magnetic tape or diskettes. You must register for this service. magnetic media and electronic
For details, call the service center. wage reporting. They can help
solve even the toughest problems.
Social Security Online: For the phone number of the
A special section for employers on SSA’s Web site has valuable, up-to-date information specialist serving your area,
and publications. Check out Social Security online at www.ssa.gov/employer.
call the Employer Reporting
Service Center.