A SEP plan’s definition of employee compensation must satisfy rules for determining the amount of contributions. The amount of compensation taken into account under the plan is limited.
You must follow the definition of compensation stated in the plan document in the operation of the plan. Compensation generally includes the pay an employee received from you for personal services for a year including:
- Wages and salaries
- Fees for professional services
- Other amounts received (cash or non-cash) for personal services actually rendered by an employee, including, but not limited to, the following items:
– Commissions and tips
– Overtime
– Fringe benefits
– Bonuses
You may use an alternative definition of compensation, permitted under IRC Section 414(s) that excludes some of the above listed items. Any exclusions of compensation must be specified in your plan document and be nondiscriminatory.
If you are a self-employed person sponsoring a SEP, the compensation on which you calculate your maximum contribution is your net earnings from self-employment. Publication 560 provides a worksheet for this calculation.
