SEP Question

[JG EA]

I am going to post this question again in hopes someone knows the answer and an answer to another SEP question.

If self employed taxpayer bases his SEP on the total of his SE income minus 1/2 the SE tax, is there any earned income left over to put into another IRA? (Assuming no other jobs.)

Put another way can he use the same income for both?

The same SE TP has employees. They are not qualified this year. Can he do an SEP for himself this year and stop it so he doesn't have to do an employee contributions next year?

Put another way does he have to keep it going if he has employees?

[Kram BergGold]

Yes to both questions

Yes and Yes

[JohnH]

Yes and no

Setting up the SEP means he is now covered by a retirment plan, and thus he is subject to the income limitations for contributing to a regular IRA. If his income is under the limits, he can contribute to the IRA and the SEP.

The SEP stands alone each year. He can do a SEP this year, not do one next year, do one the next, etc. There is no year-to-year obligation for paying into a SEP plan once it is established. He only needs to be sure that all employees (including himself) are treated the same in any year the SEP is set up with respect to years of service and percentage of income contributed. (keep in mind that the "3 out of 5" requirement must be followed for determining qualifying employees, even for years in which there was no SEP)

[Bees Knees]

Interesting question in regards to using the same earnings for both an IRA contribution and a SEP.

For example, say net profit from Schedule C is $3,000. Taxpayer is single and has no other earned income.

In regards to calculating earnings for purposes of an IRA contribution deduction, TTB, page 13-9 says:

• Net earnings from self-employment as a sole proprietor or a
partner of a partnership, reduced by the deduction for one-half
of SE taxes and any deductions for contributions to a qualified
retirement plan. Net SE earnings also include income not subject
to SE tax due to a religious election to be excluded from
Social Security coverage.

So in our example, the $3,000 net Schedule C income must first be reduced by the ½ SE tax deduction of $212, or $2,788. That amount is multiplied by 20% for a max SEP contribution of $558.

For the IRA contribution deduction, the net earnings must further be reduced by the contribution to the SEP, since a SEP is considered a qualified retirement plan. $2,788 minus $558 = $2,230, which equals the maximum IRA contribution allowed.

Of course, this is never an issue when earned income exceeds the max IRA contribution limit even after the reduction for the SEP contribution.

[JG EA]

Thanks guys! I really appreciate help.