What is Compensation Under a SEP Plan?

Compensation for an employee is normally the employee's salary, commissions, bonuses, and other income earned on the job.

However, compensation for employees generally does not include the employer's contribution to the employee's SEP-IRA.

In other words, your contributions as the employer to an employee's SEP-IRA are not added of the employee's gross pay.

Self-Employed Person's Compensation

For SEP (and qualified) plans, a self-employed person's compensation is net earnings from self-employment, which equals:

  • Gross income from your trade or business, minus
  • Allowable business deductions.

Gross Income:

Only gross income where personal services rendered were a material income-producing factor are included in determining net earnings from self-employment; not passive income earned merely as an investor.

Allowable business deductions:

In addition to ordinary and necessary expenses, allowable business deductions also includes:

  • Contributions to SEP and qualified plans for common-law employees, and
  • The deduction for one-half of your self-employment tax (deducted on Form 1040, line 27).

Reminder: Contributions to your own SEP-IRA are not deducted from income from your trade or business on Schedule C (of F). Your deduction is entered on Form 1040, line 28.

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