I have a small business that will file taxes as an S-Corp for the year of 2015. The company has 1 employee (me). I pay myself a decent salary. In order to bring the company's taxable revenue down, I started looking into SEP-IRA. Using SEP-IRA the company can contribute towards the employee's IRA. I am not sure what the limit on this is.

From IRS website:

The contributions you make to each employee’s SEP-IRA each year cannot exceed the lesser of:

  • 25% of compensation, or
  • $52,000 (for 2014; $53,000 for 2015 and subject to annual cost-of-living adjustments for later years).

Based on the above if I pay myself 80K a year then the company can contribute as much as 20K (25% of 80k).

However, I was reading an article on Forbes that states:

Your annual SEP-IRA contribution, all of it pretax, can be as much as 20% of your net earnings, up to a maximum of $50,000 for 2012 and $51,000 for 2013. (We’re assuming you operate as an unincorporated sole proprietor reporting your business earnings to the IRS on Schedule C. So that’s 20% of your net earnings after subtracting the one-half of your Social Security and Medicare taxes that are deductible.)

The article suggests that I can contribute as much as 50k. If this is true, I much rather do that instead of 20k. I understand that IRS website is probably the correct reference but my question is whether I am missing something...?

Also, as an employee I also plan to have an individual retirement account as an employee -- using which I can have a ~5k contribution.

1 Answer 1


Both are saying essentially the same thing. The Forbes articles says "as much as 20% [...] up to a maximum of $50,000". This means the same as what the IRS page when it says the lesser of a percentage of your income or a total of $53,000. In other words, the $53k is a cap: you can contribute a percentage of your earnings, but you can never contribute more than $53k, even if you make so much money that 20% of your earnings would be more than that.

(The difference between 20% and 25% in the two sources appears to reflect a difference in contribution limits depending on whether you are making contributions for employees, or for yourself as a self-employed individual; see Publication 560. The difference between $50k and $53k is due to the two pages being written in different years; the limits increase each year.)

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