Last-Minute SEP Primer, Anyone?

[George Boutwell]

SE client with 6-figure net income on Schedule C tells me a couple weeks ago that he started a SEP. That's fine, but I wish he had told me about it when he did it last year, because he also hired his first employee, a family member. A few days ago he tells me, along with a final K-1 we awaited, that he set it up to cover his employee also (by reducing the three-year employment requirement). My advice to clients about SEPs is that they are a good thing, if you have no employees, but a swamp of unintended consequences if you do.

Having advised clients to avoid these situations, I am not entirely certain of what happens when they don't. His contribution, which starts out at 25% but ends up as somewhat less than 20% of Schedule C bottom line, is deductible on the 2006 return even though he's not making the contribution until Monday (or perhaps later, with an extension filed). But if he uses the 25% figure for himself, he has to use it for his employee also, right? And that is 25% of the W-2 amount? If he funds that at the same time he funds his own, it is also deductible on the 2006 return? So his contribution is based on the lower net that results from the employee SEP contribution?

Also, the employee SEP contribution is not shown on a W-2 form, for either 2006 or 2007, and is not subject to FICA tax, right? Such a deal.

Is there any source that answers questions like these, which surely come up eventually no matter how hard we try to avoid them?

[OldJack]

Well... I am guessing that since he is making 6 figures that he has been in the business more than 3 years. Therefore, why would he want to drop the 3 year requirement and include the new employees in the SEP plan when he qualifies without them qualifying?

[George Boutwell]

>I am guessing that since he is making 6 figures that he has been in the business more than 3 years. <

Yes, but not as self-employed.

>Therefore, why would he want to drop the 3 year requirement and include the new employees in the SEP plan when he qualifies without them qualifying?<

As I said, the employee is a relative. Not just that, but an in-law.

[natiro]

Sep

My advice to clients about SEPs is that they are a good thing, if you have no employees, but a swamp of unintended consequences if you do.

Why would you advise your clients against a SEP? It's a good benefit to offer employees, if the employer can afford it, it's easy to calculate, the contribution % can vary from year to year and is not required, there are no Form 5500 reporting requirements, and there is no plan administration.

But if he uses the 25% figure for himself, he has to use it for his employee also, right?

Yes

And that is 25% of the W-2 amount?

Yes

If he funds that at the same time he funds his own, it is also deductible on the 2006 return?

Yes.

So his contribution is based on the lower net that results from the employee SEP contribution?

Yes

Also, the employee SEP contribution is not shown on a W-2 form, for either 2006 or 2007, and is not subject to FICA tax, right?

Yes

Is there any source that answers questions like these, which surely come up eventually no matter how hard we try to avoid them?

Have you tried The Tax Book?

[George Boutwell]

Thanks

Why not offer it to employees? Because the salary was negotiated before this was set up, and I think it's already too high. But then, I could probably ask all my clients for a 25% raise and they would pay it.

>Have you tried The Tax Book?<

Does it weigh four pounds and take up $40 worth of rented square footage each year? Kleinrock sends me a book like that every year. They call it something like "Express Answers". It's plastic, in case I spill coffee on it I guess. I sell it on Amazon.