DEDUCTION FOR SEP

[Patrick Michael]

Thanks in advance for all the help.

First time I had to deal with a SEP plan. Sch C TP has a SEP plan with 25% maximum contribution. Using the worksheet I get a maximum deductible contribution of $5,167 (27,800-1,964 (1/2 of SE tax) times 20% (from rate table for Self employed). The plan administrator is telling the TP they can put in up to $6,950 ( 27,800 x 25%), $5,167 from the employer and $1,783 from the employee, and can deduct the whole $6,950. This does not make sense to me since the taxpayer is both the employer and employee (why have the worksheet if they can deduct the 25%). I can't find anywhere in Pub 560 where it says this. Am I missing something? I was thinking that maybe what the plan administrator means is that they can contribute the $6,950 but only $5,167 is deductible.

Thanks again for the help.

[Lion EA]

If they have employees, the employer can contribute and deduct 25%. If SE, the SE taxpayer can contribute 20% per the formula you stated. No employee vs. employer contributions, as a SEP is an employer plan.

Maybe he has it confused with a SIMPLE where the employee, including a SE taxpayer or partner, can contribute, PLUS the employer can match the 2% or 3% per the plan.

Ask him for a cite supporting his understanding.