How SEP IRA Contributions Are Calculated

There are two sets of limits for SEP IRA contributions. The first contribution limit is the annual maximum for any self employed person, which was $49,000 in 2009. The second set of limits depends on how the self employed individual is paid and taxed on a regular basis.

Incorporated Businesses

If you own a small incorporated business, you are paid a salary from that business in the form of a W-2. In this model, you can contribute up to 25 percent of your salary not to exceed the maximum limit. You must make these contributions before the end of the taxable year in order to receive the 100 percent tax deduction on fees contributed.

Unincorporated Businesses

You may be an independent contractor receiving personal income on services rendered. In this case, you can only contribute 20 percent of your annual net salary not exceeding the maximum limit. You will have to calculate your profits, subtract expenses and determine your net salary, which is the figure you provide on your income taxes. Then, 20 percent of this figure may qualify for the 100 percent tax deduction if it is made within the taxable year. It does not matter if the contributions are made monthly or just once annually as long as they are within the year.

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