SIMPLE IRA Contribution Disallowed. Why?

[jaygar]

I'm finishing up a 1040 and see the "suggestion" that the client's $6750 SIMPLE contribution was disallowed due to "lack of self-employment income". I'm new to doing tax returns and my research of the SIMPLE plans is that it doesn't require SE income. Is that correct?

Plus, the client does have SOME SE income, but only $4811 from a K1. 

So, is there a something I can do to allow him to deduct this contribution?

TIA!

[qbteachmt]

Let's first review that "SIMPLE" is an acronym for a specific type of retirement plan. It isn't the Word Simple, as in basic or plain. It's a retirement plan established by an employer.

SIMPLE IRA participation is by paycheck deduction. The limit is $13,500 for under 50.

Does that match what you are trying to do, or are you trying to do something different and calling it the wrong thing?

[jeffmcpa2010]

Everything I have been able to find reinforces my memory that contributions are limited to the amount of Self Employment Income. 

You say he has some SE income from a partnership? Does he have an SE loss somewhere else that is offsetting the partnership SE income.?  Also if he has a Schedule C that is the SIMPLE sponsor, I do not know if you can count the K-1 SE income in computing his allowable contribution.

BTW @qbteachmt Simple Contributions ARE NOT by paycheck deduction for the owner of a Schedule C business or a Schedule F farmer, as the owners do not receive paychecks, nor would contributions  by partners in a partnership which has set up a SIMPLE plan.

[qbteachmt]

Well, as usual, we are all mindreading. I didn't see anything about "owner" and I didn't see anything about "has only SE." What I did do, is the math, that the amount in question is half the allowable amount  for an employee, as if someone wants to use Employee + Employer Match, which isn't how SIMPLE IRA plans would work. That's why I put it in the form of a question.

Details matter. More details always help. Specific details make a difference.

[jaygar]

Thanks qbteachmt.

Client has a form 5498 showing the contribution to a SIMPLE retirement plan. Client is under 50 and his contribution was $6750.

Thanks!

[jaygar]

Client does not have a schedule C. He has $4811 in SE income from a business he is a minority owner in. It is non-passive income on Schedule E, coming from a K1

[qbteachmt]

Form 5498 is informational; that is not a tax form.

We still don't know:

Is there are employer with the deductions on W2? Or, only Sched C income for the business that established the SIMPLE IRA plan? If so, is that business with the plan making enough for this contribution, or is this an overcontribution?

[qbteachmt]

Now we are cross-posting.

"He has $4811 in SE income from a business he is a minority owner in."

Is that the business with the SIMPLE IRA Plan?

[qbteachmt]

If you don't think the software is correct, go to the IRS resources:

https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan

[jaygar]

Thank you for being patient with my ignorance.

The W2 from the company where the SE income was generated shows $4500.08 in Box 12 and in Box 14 $1218 "Other" and $29522.27 "SCorpH". It does have an "X" in box 13 under retirement plan

[qbteachmt · Accepted solution]

"The W2 from the company where the SE income was generated"

To clarify, then: You have a both an employer relationship (not SE) and a K-1 as Shareholder (partner) (SE).

"shows $4500.08 in Box 12"

Is that Coded S? That would be Payroll Deduction, then. Where is $6,750 coming from? Did you read the link I provided? Do you know if they adopted a standard "they have to earn $5,000" plan?

"and in Box 14 $1218 "Other""

There is no standard for Box 14; it's informational and there should be a short notation, such as Family Sick Leave.

"and $29522.27 "SCorpH". "

That would be taxable Health, medical coverage premium if a more than 2% shareholder. "A 2-percent shareholder-employee is eligible for an above-the-line deduction in arriving at Adjusted Gross Income (AGI) for amounts paid during the year for medical care premiums if the medical care coverage was established by the S corporation and the shareholder met the other self-employed medical insurance deduction requirements. If, however, the shareholder or the shareholder's spouse was eligible to participate in any subsidized health care plan, then the shareholder is not entitled to the above-the-line deduction. IRC § 162(l). (An above-the-line deduction is a deduction the IRS allows you to subtract from your annual gross income in order to arrive at your "adjusted gross income".)"

From: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical...

"It does have an "X" in box 13 under retirement plan"

Because a SIMPLE Plan is an Employer plan. That might limit them for whatever else they might have wanted to do, such as Traditional IRA.

[jaygar]

Incredible, qbteachmt. Thank you for taking the time to explain it all.

Yes I am preparing both the individual and the company returns. I did not prepare the W2s. The difference between $6750 and $4500 was because the client sent me his 2020 5498 and not his 2021. 

Based on all this information, it appears that this is an employer sponsored plan and the $4500 was a pre-tax contribution and it "manifests" in his return in the form of lower reported gross pay. The explanation on H&R Block's site says that the amount listed in Box 12 with an "s" code was "not included in box 1".

So I'm confident that the client is getting the tax benefit of the contribution.

Thanks again.

[qbteachmt]

"The difference between $6750 and $4500 was because the client sent me his 2020 5498 and not his 2021."

Either way, this is not a Tax Form. It would be needed, for instance, as reference for FMV in some scenarios. Think of it as Proof of Deposit. Not proof of tax treatment.

"Based on all this information, it appears that this is an employer sponsored plan and the $4500 was a pre-tax contribution and it "manifests" in his return in the form of lower reported gross pay."

It's already taken into consideration for the W2 values. You just enter the W2 as is.

"The explanation on H&R Block's site says that the amount listed in Box 12 with an "s" code was "not included in box 1".

You bought a program that knows how to handle W2 entries, as long as you use the proper codes for the specific boxes.