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SEP IRA Contributions: A Guide for Small Business Owners




As a small business owner, establishing a SEP IRA allows you to contribute towards your own retirement while also providing a valuable benefit to your employees. However, it's crucial to understand the SEP IRA contribution rules to remain compliant and maximize tax advantages. Here's what you need to know:


Eligibility Requirements

Any business - sole proprietorship, partnership, or corporation - with one or more employees can set up a SEP IRA plan. Eligible employees must meet these criteria:

  • Be at least 21 years old

  • Have worked for you in 3 of the last 5 years

  • Received minimum compensation of $650 for the year


Contribution Limits for 2023

As the employer, you can contribute up to 25% of each eligible employee's compensation, up to a maximum of $66,000 per employee (combined employer and employee contributions). Only the first $330,000 of an employee's pay for 2023 is considered for this 25% calculation.


Contributing the Same Percentage

The IRS mandates that SEP contributions be made on a non-discriminatory basis. You must provide the same percentage contribution to all eligible employees' SEP accounts for that year based on their compensation levels. Alternatively, you can provide a higher percentage to lower compensated staff.


Contribution Deadline

SEP contributions can be made up until your business's tax filing deadline, including extensions. The plan itself must be established by this deadline for contributions to be deductible for a given tax year.


Reporting Contributions

Employer contributions to each employee's SEP IRA get reported in Box 8 of IRS Form 5498 issued by the SEP custodian.


Flexible Contributions

Unlike some plans, you are not required to contribute to employees' SEP IRAs every year. Contributions can vary annually based on your company's profits.


Tax Deductibility

As the employer, contributions you make to your employees' SEP IRAs are deductible as a business expense on your tax return for the year they are made.


While SEP IRAs involve some administration, they provide flexible, tax-deductible opportunities for small businesses to save for retirement compliantly. Contributions get invested for potential long-term growth until distributed in retirement. Be sure to follow all applicable rules and contribution deadlines.

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