Function

• SEP and SIMPLE IRAs are tax-deferred accounts that function much like traditional IRAs. Contributions are tax-deductible and employees pay income taxes on withdrawals, which they usually can begin taking the year they turn age 59 1/2. Employees can use SEP and SIMPLE IRA contributions to invest in securities like stocks, bonds and mutual funds, as well as nontraditional investments like real estate and gold. Any earnings the assets make are not taxed as long as they remain in the account.
  
  

Funding Types

• SEP IRAs established by employers on behalf of employees are funded exclusively by employers, who can contribute up to 25 percent of each employee's income annually. Both employees and employers contribute to SIMPLE IRAs. Employees can elect to fund their SIMPLE IRAs with payroll deductions. Employers can either agree to match employee contributions up to a certain percentage of an employee's income or contribute a flat percentage of each employee's income, regardless of how much each employee contributes.
  
  

Deduction Limits

• Each year, the IRS decides how an individual may contribute to a type of IRA. As of 2010, employers may contribute the lesser of 25 percent or $49,000 to an employee's SEP IRA and deduct the entire amount. As of 2010, qualifying employees may contribute up to $11,500 to a SIMPLE IRA annually if they are under age 50, and $14,000 if they are older. Employers who decide to match employee contributions must usually do so with up to 3 percent of an employee's income. Every two out of five years, employees are allowed to match only 1 percent or 2 percent. Employers who use flat rate must contribute 2 percent. These amounts are entirely tax-deductible.
  
  

Time Frame

• Companies that maintain a SEP or SIMPLE IRA on a calendar-year basis can take a deduction for the previous year's contributions when they file their taxes the following year. Companies that offer SEP IRAs have until their filing deadline, plus extensions, to make contributions and apply them to the previous tax year. Companies that use a fiscal year must deduct SEP and SIMPLE IRA contributions the following tax year. For instance, if a company's fiscal year ends Aug. 31, 2010, it would deduct 2010 calendar-year contributions for the fiscal year ending Aug. 31, 2011.
  
  

Filing a Deduction

• Companies deduct SEP and SIMPLE IRA contributions differently, depending on how they are structured. For example, sole proprietors who have common-law employees deduct contributions on a Schedule C, which declares profits or losses from a business. Farmers use a Schedule F. Corporations use a Form 1120, and S corporations use a Form 1120S.