The law says that the maximum annual contribution you can make to a SEP is the lower of 15 percent of an employee's pay up to $200,000, or $40,000 for 2002 ($170,000 or $35,000 for 2001; these amounts may be adjusted periodically for inflation). Since 15 percent of $200,000 is $30,000, in actual practice you can't contribute any more than $30,000 on one employee's behalf during 2002 (for 2001 the maximum contribution amount is $25,500; 15 percent of $170,000).

Self-employed? If you're self-employed, the limits are slightly lower. When figuring the deduction for employer contributions made to your own SEP-IRA, compensation is your net earnings from self-employment, which takes into account: (1) the deduction allowed to you for one-half of the self-employment tax and (2) the deduction for contributions on behalf of yourself to the plan. The end result is that you will have to reduce the contribution rate called for in your plan by using the Self-Employed Person's Rate Table found in IRS Publication 560 (you can get a free copy by calling 1-800-TAX-FORM) that tells you what percentage you can contribute to your SEP if you are self-employed. You can get the publication by contacting an IRS office near you.