SE Income determination for SEP IRA

[tlombardi]

The rules for contributions to a SEP IRA state that it is limited to 20% of SE Income. In the case of a S-corp is self-employment income limited to the wages paid or is it the wages paid plus the income of the business that flows through to the owners?

[Bees Knees]

The rules for contributions to a SEP IRA state that it is limited to 20% of SE Income. In the case of a S-corp is self-employment income limited to the wages paid or is it the wages paid plus the income of the business that flows through to the owners?

An S corporation shareholder/employee is not considered self employed. The sharholder/employee is treated as an employee. So the SEP-IRA limit is 25% of W-2 wages.

[OldJack]

SEP-IRA verses IRA contribution

I agree that a shareholder/officer of an S-corp is an employee for SEP-IRA and nothing is added to the W2 except checking the box for a retirement participant. However, if the contribution is to an IRA (without a SEP plan) rather than a SEP-IRA the full amount is taxable income added to the W2 gross. Therefore, you should see that there is in place a SEP-IRA plan usually adopted by giving all employees a copy of form 5305-SEP.

[Bees Knees]

However, if the contribution is to an IRA (without a SEP plan) rather than a SEP-IRA the full amount is taxable income added to the W2 gross.

That is not necessarily true anymore. The new "Deemed IRA" plan rules allow employers to set up traditional IRAs or Roth IRAs to allow employees to make voluntary employee contributions. Assuming the employee would otherwise be eligible to make deductible contrituions, such contributions to a "deemed traditional IRA" would be excluded from employee wages.

See TTB page 13-19.

[OldJack]

That is not necessarily true anymore. The new "Deemed IRA" plan rules allow employers to set up traditional IRAs or Roth IRAs to allow employees to make voluntary employee contributions. Assuming the employee would otherwise be eligible to make deductible contrituions, such contributions to a "deemed traditional IRA" would be excluded from employee wages.

See TTB page 13-19.

I was not referring to the IRA owned by the employee, rather the fact that a contribution is made by the employer without a documented SEP plan.

[OldJack]

That is not necessarily true anymore. The new "Deemed IRA" plan rules allow employers to set up traditional IRAs or Roth IRAs to allow employees to make voluntary employee contributions. Assuming the employee would otherwise be eligible to make deductible contrituions, such contributions to a "deemed traditional IRA" would be excluded from employee wages.

See TTB page 13-19.

I believe your "deemed IRA" is refering to voluntary employee contributions thru payroll withholding. I was referring to IRA payments, without a plan, at the deductible expense of the employer that are required to be added to the W2 gross.