Only the remaining portion of the employee's pay is taxable. The income tax on the contribution is deferred. IRS Form 5305A-SEP can be used to set up such an elective deferral. Employees also may contribute to their SEP-IRA independent of employer contributions. The employee, not the employer, owns the IRA account.
Penalties exist for early and late withdrawal.
If either or both of the two summer employees has worked during three of the last five years for this farmer, these employees also must be covered by a SEP-IRA plan. In addition, the farmer could, through an elective deferral, make IRA contributions up to 125 percent of average deferral percentage of the employee. Both the employer and the employee must pay their respective share of social security taxes on the amount of income placed in their IRAs through elective deferral. The plan covers the employer and employees. It is established for the exclusive benefit of the employees and their beneficiaries.