Contribution Limits

• For 2009, the contribution limits in a SEP plan were 25 percent of the employees salary, or $49,000, whichever is less. An employee earning less than $196,000 would have the maximum contribution limited by the 25 percent. Employees earning over $196,000 would be limited to the $49,000 cap.
  
  

Employee Contributions

• The employees in a company providing a SEP plan cannot make any salary deferral contributions into the plan. The employer pays all SEP contributions. The employer can decide how much to contribute each year, but all employees must have the same percentage of earnings deposited into their SEP-IRA account. Employees are allowed to decide how the contributions are invested if the SEP plan has multiple investment choices.
  
  

Self-Employed Contributions

• The amount of SEP contribution each year is determined by the employer up to the limits set by the Internal Revenue Service. Self-employed individuals must make adjustments to their contribution limits due to the self-employment tax and the deduction of the SEP contributions. The IRS worksheet takes into effect several adjustments to income, but a 20 percent limit is the maximum for a self-employed person with a SEP.
  
  

Limit Considerations

• SEP plans can be attractive for self-employed individuals with no employees. A SEP is easier and less expensive to set up than most pension plans and the contribution limits are high. IRS Publication 560 has a Deduction Worksheet and a Rate Contribution table for use by the self-employed to calculate SEP contribution amounts. Self-employed individuals using a SEP can plan on a maximum 20 percent contribution limit.