Discussion:S Corp SEP IRA contributions
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Discussion Forum Index --> Tax Questions --> S Corp SEP IRA contributions
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11 March 2006 | |
| If SEP IRA contribuions for a 50% shareholder are paid by the S Corp, are the contributions deductible? If so, where are they reported on the 1120S? | |
| 11 March 2006 | |
| SEP Contributions can be reported either on the pension and profit sharing line or as other dedcutions. SEP contributions are based 100% on wages paid. SEP contributions are deductible in arriving at ordinary income for the S-Corp. | |
| 11 March 2006 | |
| So there's no difference if it is for employees or >2% Shareholder of an S Corp? Anyone knows?? | |
| 11 March 2006 | |
| That is correct. But SEP contribution is limited to % of wages paid. Cannot include S distributions or K1 earnings as part of contribution base. | |
Clarklarry (talk|edits) said: | 11 March 2006 |
| If an S-corp files the return by 3/15 (doesn't extend) does the SEP payment have to be made by 3/15? | |
| 11 March 2006 | |
| SEP contribution is due by due date of return, including extensions (unlike IRA's which are due on 4/15 regardless of extension). So you can get an additional 6 months by extending the return. | |
| 12 March 2006 | |
| This SEP IRA Contribution is treated slightly different for Sch. C owner as far as where to deduct. The deduction is on page 1 of 1040, Line 28; whereas, the deduction on Sch. C is for the employees, not the owner. I guess Line 28 of 1040 is only for Self-Employed, not the S-Corp shareholder? | |
| 12 March 2006 | |
| Does that mean that if a S Corp owner does not take a salary for himself, he cannot contribute to an SEP IRA? Also, how is the SEP contribution calculated? For instance,
Revenues = $100,000 Expenses (excl. SEP contribution) = $(50,000) Net Income = $50,000 SEP will be calculated at 25% of 50,000 upto $45,000. In this example, it will be limited to $12,500. Is that correct? What happens if the S Corp owners contributes more than the above limit? | |
| 12 March 2006 | |
| Bean, you are correct. The deduction is taken on Sch C for employees but on 1040 pg 1 for owner. For S corporation, it is deducted on the corporate return, it is not a pass through on K1.
Habari, SEP contributions are based on wages paid (or Sch C earnings in the case of a proprietorship). If S corp stockholder takes no salary then he will not be allowed a SEP deduction. If your example is an S corp and not a proprietorship, the net income ( or taxable income) of the S corp has no bearing on the SEP contribution. $50,000 salary paid to stockholder X 25% = $12,500 SEP contribution. $0 salary X 25% = $0 SEP contribution. In discussing the pros and cons of the type of entity a business should operate in, I always (that's a big word, maybe I should say I try to remember to) bring up the the limitation on retirement plan contributions that will result from electing S status to reduce SE/FICA taxes. Sometimes it may be better to operate as a proprietorship so that the owner can get more into his SEP. There is a trade-off between reducing FICA taxes and reducing the retirement contribution. For a business that does not make huge dollars, usually the owner will not be able to fully fund a SEP and so saving the FICA taxes may be a way for the owner to put more into the SEP. So limiting himself to a salary of, say, $50,000 will allow him to save some FICA tax while at the same time still make a reasonable retirement contribution. | |
| 12 March 2006 | |
| For S Corp: NO Salary = NO SEP Contr.; YES Salary, then 25% of Salary up to $42,000 for 2005 ($44,000 for 2006)
For Sch.C Owner: NO Compensation (Net Income) = NO SEP Contr.; YES Compensation, then 20% of NI after 1/2 SE Tax, up to $42,000 for 2005 ($44,000 for 2006) | |
| 12 March 2006 | |
| Is there any way my client can run 2005 payroll so that the SEP IRA contribution he made in 2005 does not go waste? He also took substantial distributions in 2005 - can these be reclassified as salary & then a deduction be taken for the SEP IRA contribution? | |
| 12 March 2006 | |
| Prepare payroll tax returns for the 2005 periods for which you are considering wages.4th quarter is best. You will have late fiing penalties for any taxes due. Show zero Fed W/H & State W/H to minimize penalties. | |
JohnnyRawDawg (talk|edits) said: | 27 July 2006 |
| Habari, I am in the same situation. Would you please let me know if you were able to resolve this and how? Did you manually complete the payroll tax returns for the 2005 pay periods or did you use a particular brand of software for this?
DZCPA, do have any further suggestions on this? I own a S-Corp, took draws but no salary for 2005, and would like to prepare the payroll tax return for 2005. Thank you in advance for you help. - John | |
Death&Taxes (talk|edits) said: | 27 July 2006 |
| My lord, how many times have I seen such situations as Habari and Johnny describe! And often I also find the shareholders have disability insurance too, insurance that will only pay based on salary, not profit distributions. Not only will the 941s be late, but there is unemployment tax to deal with. Compare penalties that will accrue [Tax Interest might do this for you] with tax savings from SEP and if difference is not that great, withdraw the SEP money and do it right this year. Oh, by the way, if you go the payroll route, make sure the corporate minutes back you up. SEPs are the second way to save FICA with S Corps. A profit of 75K might lead to a wage of 55K, a SEP contribution of 13,750 with part of the difference being the payroll taxes and the balance being profit distribution. | |
| 27 July 2006 | |
| I would second Death&Taxes advice. I would go a step further; let 05 go and do it right for 06. Late filing/paying payroll tax returns 7 months will incurr very large penalties from both the feds and the state. You will have 940, 941, state unemployment, and workers comp issues. | |
Death&Taxes (talk|edits) said: | 27 July 2006 |
| One other fly in the ointment to DZ's thought of zero income tax is that if the clients are in New York, I have seen the state audit payroll and charge penalty and interest for failure to properly withhold income tax. In my case the auditor wanted to see W-4 forms to back up the small amount my client was taking from his pay [this was a C Corp but that is not the issue here]. In these cases, the W-4 would have to state 'Exempt' or have a ridiculous number of exemptions. | |
Inthepocket (talk|edits) said: | 10 January 2007 |
| I have a client who was a Sch. C last year and has a SEP in his personal name. For 2007, he formed a S-Corp (100% Owner). Does he have to open another SEP in the S-Corp name or can he just keep the SEP in his personal name, since he is a 100% owner of the S-Corp, and just deduct directly on the 1120S? | |
| January 10, 2007 | |
| No, yes, and yes. SEPs are opened in the SEP owner's name, not the S-Corp's name. | |
Inthepocket (talk|edits) said: | 10 January 2007 |
| Thanks for the quick response. Even though there are no other employees, do you have to have a formal document in the file which shows that you are setting up a retirement plan for the S-Corp? | |
| January 11, 2007 | |
| Yeah, 5305-SEP as I recall...one page maybe, just indicates who you can exclude. Be careful not to exclude your new owner! | |
Inthepocket (talk|edits) said: | 11 January 2007 |
| Great, thanks for the info. | |
| 19 February 2007 | |
| I have a partial year sch c & a partial year S-Corp - he took a salary from the S-Corp. He contributed to his SEP plan - max for the sch C income & more. I can then deduct the over the limit sch c SEP contribution on the S-Corp return as pensions expense?
And am I understanding correctly that he should set up another SEP plan under the corp name -- he is the 100% shareholder & only employee. Is there a better way to make it a fica/ss deferred contribution? Thank you! | |
| 13 December 2007 | |
| I have the same question as Jlm earlier...."if prior year SEP contribution made by Schedule C, and the same SEP is used for the current year contribution, except that the business is now a S-Corporation, then would the owner need to comply all over again with the new S-Corp plan docs which require 3 years of service, $450 in wages, etc (inasmuch as the owner's SEP is a carryover from a prior entity-Schedule C, and the S Corp is in its first year of existence in the current year. It seems that his 3 years of Schedule C might carryover to meet the new S-Corp requirements." Can anyone offer any advice on this situation? Thanks. | |
| December 13, 2007 | |
| My understanding is that terms of service roll over. So you can't inc., include the owner, and now exclude others who were eligible from prior to the corp. | |
Johnhuddleston (talk|edits) said: | 13 December 2007 |
| I believe anyone eligible in the prior plan would be eligible under the S Corp plan.
John Huddleston | |
Death&Taxes (talk|edits) said: | 13 December 2007 |
| I think ADM has posted this question twice, and what I think he wants to know would be can prior service for the sole proprietorship be used to qualify the owners while others with less service wait. Jack has a proprietorship and a SEP with a 3 year waiting period. He had been in business three years when he adopted it. He incorporates and hires others. Will his prior service as a proprietorship permit his SEP that the corporation adopts to include him, but have the other wait. I believe it does, but maybe someone can give a cite. | |
| December 13, 2007 | |
| No, he can't discriminate. If his prior service qualifies him, then it must qualify any one else as well. | |
| 14 December 2007 | |
| In my desperation for an answer, I did post twice.....sorry about that. Thank you all who have offered advice here. You have been very helpful. Now I just have to break the news to my new client's financial planner who has advised that this is not an issue. | |
| 28 March 2009 | |
| My client is also in a similar boat to MOKENACPA's client. Last year she reported her business income on Sch. C. This year she receives a K-1 (1120S). She made contributions to her SEP of $15,000 but only has $3,000 in salary wages so is limited to a $600 deduction. The 1120S has already been filed. What are her options? | |
Paramusman (talk|edits) said: | 30 December 2009 |
| 100% owner of an S-corp has w-2 fo $40K and has another employee who has w-2 of $36K. Owner also has a parttime job and partipates in that job's 401K.
question? can owner contribute to his SEP-IRA even though there is another 401(k) in another job? | |
Death&Taxes (talk|edits) said: | 30 December 2009 |
| Yes for SEP-IRA; the 401K would only limit his contribution to a 401K funded at his S Corp. | |
| December 30, 2009 | |
| Unless it's a SARSEP (and he would exceed the elective deferral limit), or the two employers are treated as one under the controlled group or affiliated service group rules. | |
| 4 January 2010 | |
| Gotta ask here, just to double-check:
Employer contributions to a SEP for a sole owner of an S-Corp are NOT subject to FICA, right? (But elective deferrals would be.) They don't show up on the W-2, and don't show up on the 941. Or do I have that wrong? So... all else equal, it makes sense for an S-Corp owner/employee to put money into a SEP rather than a traditional IRA, as a way to save FICA. All else equal. | |
| 4 January 2010 | |
| Yes, Nergui...employer contributions are not subject to FICA, but the only way to have an elective deferral is if it is a SARSEP (and those went away several years ago). The Employer SEP contributions do not show up on the W-2 or 941, you are correct.
The SEP potentially allows a larger contribution generally than the traditional IRA unless the salary is very low. | |
- some posts that duplicated a question asked elsewhere have been moved over to that other discussion, along with all responses that followed them.
