An independent contractor who is reclassified as an employee runs into difficulties. The contributions he made to his SEP account are declared nondeductible and has been hit with a penalty, by the Tax Court.
As an employee, he cannot contribute to a SEP (he would be eligible to contribute to an employers 401K) so the payments were deemed to have made an excess contribution that’s subject to a 10% penalty. Here, the IRS agent erred and imposed the lower penalty on the SEP contributions.
(Rosenfeld, TC Memo. 2011-110)