Are SEP-IRA Contributions Subject To Self-Employment Tax?
A Simplified Employee Pension (SEP) is a traditional individual retirement account that may accept expanded employer contributions, including contributions from self-employed individuals. SEPs are treated as defined contribution plans and are subject to the overall limits on employer contributions. Deductible contributions for self-employed individuals are effectively limited to the lesser of $41,000 or 25% of net self-employment income.
For self-employed individuals, the question arises as to whether contributions to an individual’s own SEP are subject to self-employment tax. It is generally well understood that SEP contributions are not subject to Social Security or federal unemployment taxes for employees. In addition, the contributions to employee SEPs are clearly deductible from the self-employed individuals’ own income as an ordinary business expense. In fact, in Publication 560, the Internal Revenue Service advises sole proprietors to deduct contributions to employee SEPs on Schedule C, before determining net income subject to self-employment tax.
Until recently, IRS publications were not consistent, however, on how to treat self-employed individuals’ contributions to their own SEPs. The IRS, however, recently has removed the inconsistent instructions, and in Publication 560, the Service advises self-employed individuals to deduct contributions to their own SEPs on line 30 of Form 1040.
Following these instructions would leave their own SEP contributions subject to self-employment tax. Is this the correct result?