<P> 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 is 92.35% of net profit . Therefore, adjusted net profit (net profit minus deduction for self - employment tax) is 92.935225% of net profit, which is close to but slightly more than net earnings . </P> <P> 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 . </P> <P> When a business is a sole proprietorship, the employee / owner both pays themselves wages and may also make a SEP contribution, which is limited to 25% of wages, namely, 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 . </P> <P> Thus the overall contribution limit (barring limits) is 20% of 92.9% (that is, 18.6%) of net profit . </P>

Who is allowed to contribute to a sep