Discussion:S corp Shareholder SEP-IRA

I talked to the IRS agent, he says, the question is focused on the S Corp earnings/distributions qualifying for the SEP-IRA!!! My client in addition to the S Corp distributions, has also received a W-2 from the S-Corp which shows a significant salary justifying the SEP-IRA contributions in my opinion. Has anyone come across this lately?

Alternatively, the K-1s can be amended to change distributions to salary, FICA taxes can be paid, and the SEP contributions can be retained.

S-Corp takes the deduction in Line 17 ? and therefore passes through K1 to shareholder and no deduction on 1040?

Going forward your client could have an Individual 401k instead of a SEP IRA and may be able to make a greater contribution.

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Apart from the wages, the S corp also has 6K of income distributed to him, but I think I can't use the $6K towards the SEP-IRA contribution, based on DKcpa above,

Is there a better retirement plan structure for an S corp sole shareholder?

Many thanks

I don't know about the 401K. Can it be combined with the sep ira?

My post didn't focus on the forms necessary to correct the problem, but instead wanted to provide a solution going forward. For example, this is what was stated in the original post by Rabaty

"talked to the IRS agent, he says, the question is focused on the S Corp earnings/distributions qualifying for the SEP-IRA!!! My client in addition to the S Corp distributions, has also received a W-2 from the S-Corp which shows a significant salary justifying the SEP-IRA contributions in my opinion."

Translation: I take an artificially low W-2 and a big K-1 so I don't have to pay as much FICA.

Problem: With a SEP, low W-2 multiplied by 25% = a small SEP contribution and Rabaty would probably like to base the contribution on the K-1.

Why do I assume this? This statement "My client in addition to the S Corp distributions, has also received a W-2 from the S-Corp which shows a significant salary justifying the SEP-IRA contributions in my opinion.."

Opinion? It's not an opinion issue. Take W-2 and multiply by 25%. Riley2 pointed that out that the calcs are based on W-2 and has nothing to do with K-1

Solution: If Rabaty gives his client the heads up on an Individual 401k vs. the SEP even with a low W-2 you can make a much larger contribution.

In this example, Client age 55 one person S corp with low W-2 30k and big 70k K-1.

2006 SEP contribution $7,500

2006 Individual 401k contribution: 20k salary deferral and $7500 PS = $27,500

A Sole Prop can have an individual 401k even though there is no salary. The salary deferral is just based on net income and the profit sharing is based on the full net but the PS contribution works out to be 20% (because you have to make a 1/2 FICA deduction)

Stockma. This now leads into your question...

On this issue, my client is a sole shareholder of his S corp. With 40K of W-2 wages, can he make a 10K SEP-IRA contribution (25% of wages)? Or is the calculation more complicated than that?

You got it 10k. The SEP calcs are W-2 X 25%.

Apart from the wages, the S corp also has 6K of income distributed to him, but I think I can't use the $6K towards the SEP-IRA contribution, based on DKcpa above,

Thank you. You got it. I'm glad my typing isn't all in vain :)

Is there a better retirement plan structure for an S corp sole shareholder?

Yes, if your client can make a greater contribution than 10k allowed in a SEP than you might recommend an individual 401k.

Assume your client is age 45 with 40k W-2 and 6k K-1. SEP contribution (40k x .25) = 10k

Individual 401k contribution (15k salary deferral) + PS (40k x .25 = 10k or in this case the full 6k since that is all that is in K-1) = $21,000 total.

Stockma in your example you could take 30k W-2 with 16k K-1 and then could make a contribution of 15k + a PS of $7500 = $22,500. You would have a lower W-2/taxable income and larger total contribution since you are leaving more $$ for the PS contribution.

A 100% shareholder in S corporation appears to be able to be able to shield his SEP contribution (based on 25% of W-2 wages) from self employment taxes as well as from income taxes because it comes through a reduced K-1 income, and is not reported on his W-2 and is not subject to self employment tax because it is a 1120S K-1.

In contrast, a Schedule C SOLE PROPRIETOR would have to pay self employment taxes on the amount of the SEP contribution amount because it would not be deductible on the schedule C and therefore would be subject to self employment tax, but not subject to income tax because it could be deducted on page 1 of his 1040.

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I would appreciate someone reviewing this and letting me know if how I handled this is correct. If not what should I have done?

I am not sure I handled this correctly for 2004 and 2005. Let me explain 2005 because i was planning on doing 2006 same way.

I have 100% owner, age 60, sole owner and only employee of S corp that makes $200,000+/ year. Each year we do max W-2 for SS and also he wants to max contributions to retirement plans. Company has 401K + he has a SEP that is from when he was a sole proprietor.
2005 max contributions with catch up was $42000 + $4000 = $46000
W-2 was 90000 x .25 for profit sharing = -22500
Elective deferral 14000 + 4000 -18000
I put balance of $5500 on form 1040 line 28 SEP - 5500

Thank you for your help.

Rick

Thank you again. Rick

I have a 100% shareholder $27,000 W-2 income Corp has $10,000 disbursement (directly to the shareholder) for SEP

OK, obviously too much! And is it necessary that the check be written to the financial institution where the SEP is held? How do I fix this mess? Thanks so much or any help!

I have a 100% S Corp shareholder (only corporation employee) that setup a SEP-IRA starting 2008.

Is it an employee deferral like a 401(k) and SIMPLE where employee defers portion of salary that reduces gross salary - where FICA and Medicare withholding is based on gross before deferral - FWT and SWT based on after deferral; corporation shows -0- pension expense, or

Is the employee taxed on gross for all the withholding taxes, and the corporation take a 100% expense deduction for the contributon?

I know that for 2008 - it's salary x 25%; limit contribution is $ 46,000. This particular client will never hit the limit.

There is a pretty good discussion here: http://www.individual401k.com/sep_ira/

That's just what I needed to know for setting up a SEP for a SubS (100% shareholder-only employee) client. Wanted to set it up and to it right.

I have two separate SEP questions - I apologize in advance if it's not proper etiquette to put two scenarios in one post :)

1. I have a new client who had a Schedule C until the middle of 2006 - at which point he started an S-Corp for that business. He had a SEP in his name for the Schedule C. In 2007 he made contributions to the SEP out of the S-Corp. In 2007 he also had employees for the first time. Questions - is there a legal requirement to change the SEP to the S-corp? I plan on putting the deduction on the S - I'm more concerned about whether or not he needs to file a new 5305-SEP. If he does so, and sets it up so employees have to have worked 3 out of 5 years - does his years of service as a Schedule C filer somehow come into play? In other words can he qualify without his new employees qualifying?

2. I have a self employed individual who also has an S-Corp. and is the only employee. He has had a SEP for the schedule C for years and no retimrement plan for the S-Corp. This year the Schedule C will not have much income - is there any reason he can't have a SEP for the S-Corp and fund that one this year (understanding that the funding will need to come from the S-Corp).

Many thanks for your help!

Thanks for the response!