SEP IRA

Posts Tagged ‘profit sharing plans’

How does a self-employed individual calculate his/her SEP or profit sharing plan Contribution amount?

Note: IRS Publication 560 contains a worksheet to calculate a self-employed person’s maximum Contribution.

A sole proprietor’s or general partner’s allowable Contribution to a simplified employee pension (SEP IRA) or profit sharing plan (Keogh) is tax deductible. It is shown as an “adjustment to income” (AGI adjustment) on IRS Form 1040.

The Contribution limit, assuming no other retirement plans (such as a money purchase plan), is limited to the lesser of 25% of net “earnings” from self-employment (after certain adjustments) or $44,000.

If you have net earnings from self-employment before adjustments of $218,510 or more in 2005 ($213,310 for 2004) the maximum Contribution of $44,000.

To get a rough estimate of the Contribution limit at lower earnings levels, multiply net self-employment earnings (revenues less expenses) by 18% (the figure has been reduced by certain adjustments).

SEP IRAs and profit sharing plans are both defined Contribution plans and are subject to combined limits. The contributions to the SEP IRA plan or profit sharing plans or Keogh must be made by the tax filing due date including extensions for the year.

Incorporated Business:

To determine contributions for employees of incorporated businesses, including the salaried business owner, multiply the individual’s W-2 earnings by the Contribution rate of up to 25% (subject to maximum Contribution of $44,000 for 2006.

No special earnings adjustment is required for employees. For a precise calculation of the Contribution limits for unincorporated business owners, use the worksheet below.