SEP Contribution while contributing to a 401(k)

Submitted by Harold Morrow on Tue, 2024-01-23 19:13

Employee contributions to a 401(k) in the amount of $5,500 in 2023. He has a sideline business and wants to establish a SEP and contribute 25% of his net profit of $80,000, contribution of $20,000. Are there any problems with this that I may be unaware of?



Submitted by David Mertz on Tue, 2024-01-23 20:32

  • There is no problem contributing to a SEP plan based on self-employment income as long as he does not have a controlling interest in the employer providing the 401(k) that would result in the businesses being a controlled group.
  • The maximum permissible SEP contribution is 20% (not 25%) of net earnings from self-employment, a contribution of substantially less than $20,000 on $80,000 of net profit.  Net earnings are net profit minus the deductible portion of self-employment taxes.  See Chapter 5 of IRS Pub 560.

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