SEPs were created to allow self-employed persons, sole proprietors, partnerships, small businesses, government agencies, and corporations to provide retirement plans via an easily established and maintained retirement program.
A Simplified Employee Pension (SEP) Individual Retirement Account is a variation of the Individual Retirement Account.
Traditional retirement programs require more paperwork and accounting than most small businesses can afford. By comparison, SEPs are very easy and inexpensive to establish and maintain.
Employee eligibility conditions may not be any more strict than (i.e. can be less strict):
SEP-IRA funds are taxed at ordinary income tax rates when qualified withdrawals are taken after age 59.5 (the same rule as for traditional IRAs). Contributions to a SEP plan are deductible: they will lower a taxpayer's income tax liability in the current year.
SEP-IRA contributions are treated as part of a profit-sharing plan. For employees, the employer may contribute up to 25% of the employee's wages to the employee's SEP-IRA account. For example, if an employee earns $40,000 in wages, the employer could contribute up to $10,000 to the SEP-IRA account because 25% of $40,000 equals $10,000.
The total contribution to a SEP-IRA account is the lesser of 25% of income (20% for self-employed before self-employed tax credit is included; see below) or $50,000 for 2012, or $51,000 for 2013; thereafter, they are subject to annual cost-of-living adjustments for later years. Note that contributions may be made to the plan up until the date that the employer's return is due for that year.