How much you can contribute to a SIMPLE IRA plan and claim as a deduction

Contributions to the employees’ SIMPLE IRA plan accounts consist of the amounts the employees contribute through salary reductions, and the amounts you contribute as matching or nonelective contributions. Employees can choose to contribute a percentage of their compensation, or a fixed amount, up to a maximum per year. These annual limits are published by the IRS and can be found in IRS Publication 560, Retirement Plans for Small Business.

As the employer, you are generally required to match each employee’s contribution on a dollar-for-dollar basis up to 3% of the employee’s compensation. If you decide to make nonelective contributions, you contribute 2% of each eligible employee’s compensation, whether or not they make their own contributions.

The contributions you make to your own SIMPLE IRA as a self-employed individual consist of the percentage of your net earnings from self-employment that you choose to contribute, plus either the matching contribution of up to 3% of your net earnings, or the nonelective contribution of 2% of your net earnings. In other words, your own contribution is treated the same as for other employees, except that your contribution is based on your net earnings rather than on compensation.

Employees are not subject to federal income tax on the amounts they elect to contribute to the SIMPLE IRA plan, or on the contributions you make as the employer. Salary reduction contributions are subject to Social Security, Medicare and federal unemployment taxes, but the matching or nonelective contributions you make as the employer are not subject to these taxes.