SEP - cash basis S corp.

[KJ Judd]

When is the deadline for a cash basis S corporation to make a deductible 2007 contribution to a SEP for its employees?

I know for individuals they have until the extended due date of their tax return. Does it work the same for S corporations? Or do the rules of need to be paid by December 31st for cash basis taxpayers apply?

Also, it will be a new SEP. Does it need to be established by December 31st even if not funded until 2008?

First time I've encountered this and don't want to lose the deduction because of my ignorance in funding. Thanks and Merry Christmas to all!

[JohnH]

Flexible

The SEP can be established at the time the funds are deposited in the SEP account - it is not necessary to establish the SEP or take any other action by Dec 31.

The corp has until the due date of the corp tax return (INCLUDING extensions) to make the SEP contribution and still take the deduction. So with an extension, the corp has until Sep 15, 2008 to make the contribution and deduct it on the 2007 return. This is true for both cash basis and accrual basis corporations.

The only thing you need to remember is that if the corp plans to make a SEP contribution, the "Pension Plan" box must be marked on the W-2 form issued in January.

[Bees Knees]

The tax return due date of the employer plus extensions applies to all employer contributions to qualified plans.

Employee elective deferrals, on the other hand, must be withheld from employee pay during the tax year to which they apply, and the employer has 15 days in the case of a SIMPLE, or 30 days in the case of a 401(k) to deposit the funds into the employee’s retirement plan account. Thus, January 30, 2008 is the last possible due date for the employer to deposit employee elective deferrals for 2007 calendar year employers.

The thing about SEP plans is there are no employee elective deferrals, other than the old SARSEP plans. Thus the reason why you have until the tax return due date plus extensions to deposit employee SEP contributions is because they are not considered employee elective deferrals. Employee SEP contributions are considered employer contributions. This is true for all employers, regardless of whether they are a sole proprietor, partnership, or corporation.

[KJ Judd]

Thanks! JohnH, in my focus on year end tax planning, I completely forgot about checking the box on the W-2.

[JON]

Checking the W-2 box

Makes no difference for the 2007 contribution to be made. If you have an extension for the corporate tax return, partnership tax return or the individual tax return for the schedule C form 1040 it extendes the contribution period for making the contribution. Makes no difference to if you have checked the W-2 box as when made you have made the tax deposit.

[JohnH]

Are you sure about that?

You might want to double-check your info. Failure to check the box on the W-2 could mislead someone into making an improper IRA contribution if their income exceeds the phase-out limits. Having a SEP through a corp makes one an active participant in a retirement plan.