Employer Contributions

• Under a SIMPLE IRA, an employer must make deposits each year in the form of an employee contribution match or a non-elective employer contribution. The match option is a dollar-for-dollar match of employee contributions up to 3 percent of the employee's salary. The non-elective option deposits a value equal to 2 percent of pay for each employee, whether or not he participates. These employer contributions are tax deductible.
  
  

Employee Contributions

• Employees may set aside 100 percent of their pay up to the annual limit -- $10,500 in 2010. These contributions are not tax deductible for employers. They are, however, removed and deposited before tax is calculated on employee's salaries.
  
  

Taking the Deduction

• Deduct the value of employer contributions to employee SIMPLE IRA accounts on your annual tax return. For sole proprietors, the deduction is entered on Schedule C of Form 1040 or Schedule F if you are a farmer. Partnerships should deduct on Form 1065, while corporations use Form 1120 or 1120S. If you are a sole proprietor, deduct the employer portion of your contributions on line 28 of your 1040 form. Partners will show their deductions on Schedule K-1 as part of the Form 1065 filing process.
  
  

Timing Concerns

• SIMPLE IRAs should be established between Jan. 1 and Oct. 1. Contributions can be made at any time during the calendar year. If you do calendar year accounting, contributions made between Jan. 1 and your tax filing deadline for the year -- April 15 of the following year -- are deductible for that calendar year. If you use a non-calendar fiscal year, you can deduct any contributions for the calendar year that began your fiscal year. For example, if your fiscal year began Oct. 1, 2009, you will deduct any contribution deposited between Jan. 1 and Dec. 31, 2009, on your Sept. 30, 2010, tax year return.