In setting up a SEP, you have to decide what percentage of compensation you'll use to determine your SEP contributions. This number, known as a contribution allocation formula, is really just a fancy name for figuring out which percentage you will use.

Generally, your SEP contributions must be made in an amount that is the same percentage of total compensation for every employee. Note that this requirement merely obligates you to use the same percentage for every employee; it does not require you to use the same percentage every year (or even to contribute every year).

As a practical matter, you'll want to wait until you know how much money you have available for SEP contributions (usually after the books are closed at the end of the year) before determining the percentage.

Notices for employees. After you have determined the percentage and made the contributions, you must give written notice to each participant detailing your contributions to their SEPs. The notice must be made by the later of January 31 of the year following the year for which a contribution is made, or 30 days after the contribution is made.

 

Let's say you operate on a calendar-year (January to December) basis. After the end of the year, you figure out how much you want to contribute to your employees' SEPs and you make those contributions on January 15. You have until February 14 to give your employees the notice. Now let's say your fiscal year ends September 30. You make contributions to your employees' SEPs on October 20. You have until January 31 to give your employees the notice.