A SEP-IRA is a Simplified Employee Pension plan that uses a IRA format. 

The SEP-IRA is designed for small business including sole proprietorships, partnerships and corporations as well as self employed individuals.  SEP's are popular with self employed people because they are simple to establish, don't involve a lot of paperwork and allow you to contribute more money. 

SEP plans can be established almost anywhere including banks, brokerage firms or mutual fund companies.

Funding a SEP-IRA 

These plans are funded with employer contributions only. The employee's do not make elective deferrals. Contributions for the employer are tax-deductible.

Employer Contributions 

Up to 25% of compensation up to a maximum of $49,000 for 2011 and $50,000 for 2012.

If you're a sole proprietor, your compensation is the net earning that you report on a Schedule C of Form 1040 after deducting your  SEP-IRA contribution.  There's a formula to help you calculate this in  IRS Publication 590.

If you have employees, they must be included in the plan.  They receive the same contribution percentage of compensation that you choose for yourself.  You, as the employer will contribute directly into their IRA accounts, and the employees can decide how and where the money will be invested.  The money in these accounts is vested, so employees can take the money with them if they leave the company.

These plans must be established and funded by the employer's tax filing deadline which is generally April 15.

Rules regarding the SEP qualification:

  1. SEP contributions are discretionary.
  2. The SEP must cover all employees who are at least 21 years of age and who have worked for the employer during three of the preceding five calendar years.
  3. Contributions need not be made on behalf of employees whose compensation for the calendar year was $500 or less.