Retirement tax questions

One of the most attractive things about SEP IRAs is that they have extremely high contribution limits. Employers can contribute up to a quarter of the salaries that each employee earns up to an annual maximum limit. For 2017, that maximum will be $54,000, up $1,000 from its 2016 level. That's the first rise in the SEP IRA limit since 2015, because inflation levels were so low last year that they didn't produce any increase in the figure for the 2016 tax year.

Note that the 25% limitation works a little differently for those who are self-employed. In that case, the 25% refers to the self-employed worker's net earnings from the business. To calculate that figure, you have to start by taking out the half of the self-employment tax, which represents the employer's portion of the payroll taxes that go toward Social Security and Medicare. Next, you have to account for the fact that the contribution to the SEP IRA reduces the taxable earnings from the business. The net result of that math is that the 25% limitation on net earnings works out to 20% of your adjusted profit after the self-employment tax adjustment.