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i thought its 25% of the gross.
would she have to take any special steps to be able to qualify for this type of contribution, i.e. incorporate?
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You can file as a sole proprietorship. No need to incorporate. Just file a schedule C.
Some links to contribution maximums.
http://en.wikipedia.org/wiki/SEP-IRA
Self-employed
The contribution limit for self-employed persons is more complicated; barring limits, it is 18.587045% (approximately 18.6%) of net profit. The computation is in IRS Pub 560, section 5, Table and Worksheets for the Self-Employed, specifically Deduction Worksheet for Self-Employed.
The two issues are:
* FICA tax
* Reduced rate
[edit] FICA tax
SEP contribution limits are computed, not from net profit, but from net profit adjusted for the deduction for self-employment tax (2006 Form 1040, line 27, from Schedule SE, Section A, line 6, or Section B, line 13). Barring limits, this is half the 15.3% FICA tax, levied on net earnings, which are 92.35% of net profit. Thus adjusted net profit (net profit minus deduction for self-employment tax) is 92.935225% of net profit; note that adjusted net profit is close to but slightly more than net earnings.
[edit] Reduced rate
The limit of 25% applies to wages, not (adjusted) net profit.
In the above example, where an employee earns $40,000 and the employer contributes 25% of that, $10,000, the employee has received $50,000 total, of which 20% goes to the SEP-IRA.
When a business is a sole proprietorship, the employee/owner both pays themselves wages, and makes an SEP contribution, which is limited to 25% of wages, which are profits minus SEP contribution. For a particular contribution rate CR, the reduced rate is CR/(1+CR); for a 25% contribution rate, this yields a 20% reduced rate, as in the above.
[edit] Overall
Thus the overall contribution limit (barring limits) is 20% of 92.935225% (which equals 18.587045%) of net profit.
For example, if a sole proprietor has $50,000 net earnings from self-employment on Schedule C, then the "1/2 of self-employment tax credit", $3,532, shown on adjustments to income at the bottom of form 1040, will be deducted from the net earnings and the result is multiplied by 20% to arrive at the maximum SEP deduction, $9,293.
Note that net earnings INCLUDE the proposed deduction for contributions to your own SEP-IRA. In this example, the sole proprietor has therefore $59,293 in net income before his (maximum) SEP-IRA contribution.
Krishan
Krishan