If an employer contributes to a SIMPLE or SEP individual retirement account (IRA) on behalf of its employees, the Internal Revenue Service allows the employer to deduct its contributions on the company’s federal tax return. The IRS only permits an employer to contribute to an employee’s SEP account. However, both an employer and an employee can contribute to a SIMPLE IRA. Even if an employee chooses to contribute to a SIMPLE IRA, he cannot deduct his contributions on his tax return.
Employer SEP-IRA Contributions
The IRS permits an employer to choose to make contributions to its SEP IRA plan each year, regardless of whether the company records a profit. If an employer chooses to contribute to its SEP plan, the IRS requires the employer to contribute to the IRA accounts of every employee eligible to benefit from the retirement plan. The IRS currently allows an employer to contribute up to 25 percent of an employee’s annual compensation, or $49,000, whichever is less, to the employee’s SEP IRA each year.
SEP IRA Deductions
The IRS currently allows an employer to deduct its contributions to a SEP IRA plan in an amount equaling up to 25 percent of the employer’s eligible payroll. The IRS permits an employer to consider an employee’s first $245,000 of compensation when determining how much to contribute to a SEP IRA. But the IRS does not allow the employer to deduct more than $49,000 due to a contribution made to the SEP IRA of a single employee.
SIMPLE IRA Contributions
The IRS mandates that an employer make annual contributions to a SIMPLE IRA plan. An employer may choose to make matching contributions to the accounts of every eligible employee who participates in the retirement plan by deferring a portion of their salaries into their retirement accounts. Alternatively, an employer may make nonelective contributions to the accounts of all employees eligible to benefit from the plan, regardless of whether they contribute to their own accounts. Currently the IRS generally requires an employer to contribute 3 percent of an employee’s pay to his SIMPLE IRA.
SIMPLE IRA Deductions
If an eligible employee chooses to defer a portion of his salary into a SIMPLE IRA, the IRS does not tax the amount contributed as earned income. This means the IRS excludes the contributed amount from the employee’s taxable income for tax purposes. The IRS, however, assesses Social Security, Medicare and federal unemployment taxes to an employee’s deferred compensation. The IRS allows an employer to deduct its contributions to a SIMPLE IRA plan on the company’s tax return on a dollar-for-dollar basis.
- IRS.gov; Retirement Plans for Small Business; March 2011
- IRS.gov; Individual Retirement Arrangements (IRAs); February 2011
- IRS.gov. "Income ranges for determining IRA eligibility change for 2021." Accessed Nov. 01, 2020.
- Internal Revenue Service. "Retirement Topics -- 401(k) and Profit-Sharing Plan Contribution Limits." Accessed June 22, 2020.
- IRS.gov. "2021 Limitations Adjusted as Provided in Section 415(d), etc.," Page One. Accessed Nov. 01, 2020.
Deborah Barlowe began writing professionally in 2010. With experience in earning securities and insurance licenses and having owned a successful business, her articles have focused predominantly on finance and entrepreneurship. Barlowe holds a bachelor’s degree in hotel administration from Cornell University.