Chapter 14 - SEP IRA Plans Compensation SEP contributions and deductions are based upon the individual's compensation received from the employer by the employee during the plan year. [IRC §402(h)(2)(A) and §408(k)(7)(B)] For common-law employees, employers typically use IRS Form W-2, Wage and Tax Statement, as the definition of compensation. However, some prototype and individually designed SEPs may have leeway on the precise definition of compensation they use for SEP contribution purposes. Employers must follow the definition of compensation included in the SEP plan document. Also, the law defines compensation differently for common-law employees and self-employed persons. IRA Digital Reference Manual © PMC