How to Contribute to a SEP-IRA

You make the contributions to:

  • A traditional individual retirement arrangement (IRA), or
  • Traditional individual retirement annuity set up for each eligible employee. Employees can set up their own account.

Where to send contributions:

You send the contributions to the financial institution where the SEP-IRA is maintained.


If you're self-employed you are considered an owner/employee and make contributions to your own SEP-IRA.

More than one business:

If you have more than one business, but only one has a retirement plan, as a self-employed person, your own contribution and contributions for employees (if any) is based on the earned income from that business.

SEP-IRA Contribution Limits

For tax year 2012, contributions you make to an employee's SEP-IRA cannot exceed the lesser of:

  • 25% of the employee's compensation or
  • $50,000 ($49,000 for 2011)

Excess Contributions:

SEP contributions to employees' SEP-IRA accounts are not included in their gross income unless they exceed the annual limit (see above). Contributions that exceed the annual limit are called excess contributions.

Self-Employed Persons:

The annual limits on contributions to your own SEP-IRA are the same that apply to your common-law employee's SEP-IRAs.

However, self-employed persons must perform a special computation to figure their own maximum deductible contribution.

Annual Compensation Limit:

The annual compensation limit you may consider for determining the amount of an employee's contribution for tax year 2012 is $250,000 ($245,000 2011).

For retirement plan purposes, a self-employed person is considered both employer and employee of his business. This comes into play for SIMPLE IRA plans, which are salary-reduction retirement plans.

With a SIMPLE IRA, a self-employed person may make a contribution to his or her own account as an "employee", then, putting on the "employer's hat", a self-employed person may make a second contribution to his or her own account, called a "matching contribution". Bottom line, a self-employed person gets to make two separate contributions for his or her own benefit; one as an "employee" and another as "employer".


Keep in mind, for income tax purposes, a self-employed person is not considered an employee of his business; the owner does not get a paycheck like employees do. When a self-employed person takes funds out of the business, its called a draw and not wages or salary. wages and salaries are recorded as expenses while draws are debited to the draw account a serve to reduce capital.

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