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 is relevant for determining contributions that may be made to 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 your "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 employee and another as employer.


For income tax purposes, a self-employed person is NOT considered an employee of his business; no paycheck or W-2 is issued to the owner at year end.

When a self-employed person takes funds out of the business, it's called a draw and NOT wages (or salaries). Wages are paid to employees and are deducted as expenses, which reduce net income. Draws, on the other hand, are NOT expenses of the business and are not used in determining the net income of the business. Draws reduce the capital of the business.

The draw account contains a debit balance. The capital account contains a credit balance. The difference between the two accounts (offsetting them against each other) represents the capital of the business. For example, if the balance in the capital account is $50,000 and the balance in the draw account is $30,000, the capital of the business is $20,000 ($50,000 minus $30,000).

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