? on SEP IRA contribution limits?

Question

I am in a LLC..I have a base salary + dispursement quarterly. Can i take 25% of both of these as a contribution ? or just the salary portion ? thanks

Answer 1

As of 2005, employers can contribute a maximum of 25% of the first $210,000 of an employee's eligible compensation, or $42,000, whichever is less. Be careful not to exceed the limits; a non-deductible penalty tax of 6% of the excess amount contributed will be incurred for each year in which an excess contribution remains in a SEP-IRA.

In the case of self-employed people, the contribution is based on the net profit from the business (not the gross income). Calculating the maximum allowed requires you to compute the self-employment tax.

This seems to be the formula, where "CR" is the contribution rate, like .15 for a 15 percent rate:

CR * ( ( Schedule C profit or LLC SE income, if any - ( 0.5 * Shedule SE tax )) / ( 1 + CR ) )

Employees are able to exclude from current income the entire SEP contribution. However, the money contributed to a SEP-IRA belongs to the employee immediately and always. If the employee leaves the company, all retirement contributions go with the employee (this is known as portability).