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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 include:

  • Contributions to SEP and qualified plans for common-law employees, and
  • The deduction for one-half of your self-employment tax (deducted on Schedule 1, line 14 of Form 1040).

Reminder: Self-employed persons do not deduct contributions to their own SEP-IRA on Schedule C (of F for farming). Instead, the deduction is entered on Schedule 1, line 15 of Form 1040.

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