Employers can choose when they want to make SEP IRA contributions, and they’re not required to contribute every year. For instance, if your business has a rough year and you need to tighten the purse strings, you could skip contributions that year. You could also be more generous with contributions during a profitable year. However, SEP IRA contributions provide a tax deduction for your business, either for the amount of your contributions or 25 percent of your employee’s compensation, whichever is less. So not contributing for a year means you don’t get that deduction in that year.
The SIMPLE IRA is somewhat different. As with a 401(k), contributions can come from both the employee and the employer. But with a SIMPLE IRA, the employer is actually required to contribute. As an employer, you can either match the employee contributions dollar for dollar up to three percent, or you can give all your employees a contribution equal to the same percentage of their salaries, whether or not the employees contribute.
Bear in mind that, unlike a SEP IRA, a SIMPLE IRA doesn’t allow employers to skip a year of contributions. However, all of the employer’s contributions are tax deductible.
How Much Money Can Be Contributed?
For a SEP account, an employer can contribute up to 25 percent of each employee’s salary pre-tax (or up to $58,000 in 2021, whichever is less) and must make contributions at the same percentage of salary for every employee.
Employees and owners are both also able to contribute to a traditional or Roth IRA, but contributions to a SEP IRA reduce the amount they can contribute to those other plans.