How Do SEP IRAs Work?

Caps on contributions

One cannot contribute more than 25 percent of one's income to a SEP IRA each year. In addition, the amount contributed to a SEP IRA account is limited to $49,000 in 2009. It will increase slightly for inflation in the future.

Logistics

In order to receive contributions from the employer, the employee must have an IRA account in which the deposit is to be made. Many brokerages require that the IRA be labeled as a "SEP account" in order to keep track of it versus a traditional IRA.
Make sure that every eligible employee is covered by the SEP IRA. Failing to cover an eligible employee under the SEP IRA can make the entire SEP IRA program of the business noncompliant with the Internal Revenue Service. This in turn could create challenges to the tax deductibility of contributions made into the SEP IRA.

References

• SEP IRAs