Payments that you make to a Simplified Employee Pension (SEP) IRA are tax deductible. However, there is a maximum limit that you’re allowed to deduct each year. As of 2014, the maximum deduction amount that a business can take for putting money into its employees’ SEP IRA is 25% of its employees’ wages or the amount that the business contributed, whichever is less. Additionally, you could be eligible for a tax credit of up to $500 per year for the first three years your SEP IRA account is open and you’re making contributions.
What is a SEP IRA?
A SEP IRA is a type of traditional IRA available to self-employed individuals, freelancers and small business owners. Employees are not able to contribute to a SEP IRA that the company they work for opens for them.
What Criteria Makes an Employee Eligible to Participate in an Employer’s SEP IRA?
As of 2014, employers can set up a SEP IRA and make contributions for any employee who is:
• Age 21 or older
• Has worked for the employer for at least three of the previous five years
• Has been paid at least $550 in earned income during 2013 and/or 2014
How Much Can You Contribute to a SEP IRA?
The maximum contribution limit for SEP IRAs varies from year to year. As of 2014, employers can contribute up to 25% of each employees’ gross annual income or $52,000, whichever is less. The same limits apply to self-employed individuals and freelancers. However, even though there is a maximum amount of contributions that can be made each year, employers are not required to contribute to their employees' SEP IRAs annually.