Discussion:SEP IRA Company Contribution

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Discussion Forum Index --> Tax Questions --> SEP IRA Company Contribution


SunGod (talk|edits) said:

23 March 2007
Sole employee-stockholder of an S-corp received W2 from corp. W2 shows $80k in wages plus $6k in fringe benefits (S-corp health insurance). Is the SEP-IRA 25% computed on $80k or $86k? Thanks!

Mtmckeecpa (talk|edits) said:

24 March 2007
Sungod,

I would use the $86k as long as the $86 is reflected in box 1, taxable wages, of the W-2.

I don't have a reference to give but that is one reason to properly report health insurance on the W-2, the extra bump for a SEP...or that is what all the seminar presenters say.

Riley2 (talk|edits) said:

25 March 2007
For nonshareholders, the SEP contribution is based on the W-2 box one amount plus the amount of elective deferrals plus the amount of cafeteria plan salary reductions. Sec. 404(a)(12) and Sec. 415(c)(3)(D). For shareholders, the contribution is based on the amount in box one (or the amount that should have been in box one - $86,000).

Glmpllc (talk|edits) said:

25 March 2007
Sungod...the max contribution is 25% of the 86K less the SEP contribution...ultimately, the algebra reduces the calculation to 20% of the 86K...or $17,200

Mtmckeecpa (talk|edits) said:

25 March 2007
Glm,

Isn't that if the TP is a Sch C filer? Is this case, the TP is receiving a W-2 so still 25% of eligible wages, right?

Glmpllc (talk|edits) said:

25 March 2007
...right you are MTM...have sched C's on my mind...and blew that calc too, forgetting to reduce for 1/2 SE tax...must be time for a break

DebP (talk|edits) said:

1 February 2014
Looking at Riley2's comment above:

For nonshareholders, the SEP contribution is based on the W-2 box one amount plus the amount of elective deferrals plus the amount of cafeteria plan salary reductions. Sec. 404(a)(12) and Sec. 415(c)(3)(D). For shareholders, the contribution is based on the amount in box one and all the numerous comments through the years including one just last month, it's interesting between the shareholder and non-shareholder compensation definition. I have a husband-wife in an S-Corp in a solo 401(k) plan. He is sole shareholder and also live in a community property state. They both work, and deferred full 401(k). Now I go for my P/S portion based on 25%. Different amounts although same pay because wife has deferred comp so gets included in computation, but husband doesn't get that included?

That seems odd. He also has health insurance in Box 1, but I know that gets included in his computations.

And why can't I figure out how to use underlines or italics? Whenever I press the box above, I just get a bunch of quotation marks.

Ckenefick (talk|edits) said:

1 February 2014
And why can't I figure out how to use underlines or italics?

Highlight the section you wish to italicize...then click the "I" button...Yes, all you'll see is quotation marks...but once you click "save your reply," it will post as italics.

DebP (talk|edits) said:

1 February 2014
Thanks, Chris. Any thoughts on the rest of my question?

Ckenefick (talk|edits) said:

1 February 2014
Yeah, I don't see why there's a difference between shareholders and non-shareholders, other than the fact that a 2% S/H can't pre-tax anything through a 125 Plan.

So, I think we go (1) Box 1 [which includes S/E Health for the 2% Shareholder] (2) plus 401k elective deferrals, whether you're a shareholder or not (3) plus 125 deferrals for the non-shareholder [amount should be $0 for the 2% Shareholder].

DebP (talk|edits) said:

1 February 2014
Thanks. I meticulously went through each of the discussions related to SEP and health insurance. And although I don't really agree or even understand how in the world wages not subject to FICA can be included in a SEP contribution calculation, I seem to be outnumbered about 100 to 1, except for DougM. It's just not logical, but maybe nothing is. Riley2 was so careful to split out that shareholder/non-shareholder difference above though, but not seeing the issue.

Ckenefick (talk|edits) said:

2 February 2014
And although I don't really agree or even understand how in the world wages not subject to FICA can be included in a SEP contribution calculation,

I don't see why it's all that earth shattering. As R2 noted above, an employee gets compensation credit for Sec 125 deferrals, which are amounts that employee doesn't even pay tax on - no SS tax, no Medicare tax, no income tax. In addition, the rules state that fringes under 132(f)(4), which aren't taxable at all to an employee either, count as compensation for SEP purposes. So, I don't think it's all that earth shattering. I agree that its not totally clear-cut, however. But RIA concludes that the Health Insurance in Box 1 should count as SEP-eligible compensation. I tend to think that if the IRS tells us that's it not a tax-free fringe and that we must put it on a W2, and it is definitely taxable to the Shareholder, how can it not be compensation? I would also note that the related 1040 S/E Health deduction is not a gimmee.

WEISSEA (talk|edits) said:

2 February 2014
Compensation includes elective deferrals and certain other contributions made on a pretax basis, ref IRC 404(a)(12) and 404(n), which lead to 415(c)(3). 415(c)(3) "In general the term "participants compensation"
means the compensation from the employer for the year.Special rule for the self employed substitute earned income. 415(c)(3(D); The term term participants compensation include; (i) Any elective deferal defined in section 402(g)(3) (ii) any amount whcih is contributed or deferred by the empoloyer at the election of the employee by reason of section 125,132(f)(4) or 457.

Doug M (talk|edits) said:

3 February 2014
Contributions to the employees' SEP IRAs must be based on a written allocation formula that specifies the requirements an employee must satisfy to share in an allocation and the way the amount allocated to each employee's account is computed (Code Sec. 408(k)(5); Prop. Reg. Sec. 1.408-7(e)(1)

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