SEP-IRA contribution by self-employed Sch C

Forum|Forum|3 years ago
December 20, 2022
2 replies
24 views

Client wants to contribute 3% of W-2 wage to each employee's SEP-IRA. He found an IRS instruction that he must contribute same 3% for himself. But when I check the maximum box, it's a lot more. Which is correct?

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Best answer by sjrcpa

I may indeed be mixing it up with Simple. But it's too late for client to set up a Simple. So for SEP-IRA, does employer have to do same % as he does for his employees?

Would it be OK, this being 1st year, for him to just do SEP for himself and skip employees?

"for SEP-IRA, does employer have to do same % as he does for his employees?" YES

"Would it be OK, this being 1st year, for him to just do SEP for himself and skip employees?" NO. If there is a contribution for the owner, there must be a comparable contribution for each eligible employee.

sjrcpa

Level 15

If he wants to do the maximum for himself, he has to contribute the same, as a % of wages, for all of the eligible employees. You can't discriminate in favor of the owner.

The more I know the more I don’t know.

dd4vols

Intuit Community Champion

Then just don't check the maximum box. He does not have to contribute the maximum, as a matter of fact, as @sjrcpa alluded to. he just has to contribute at the level he contributes to employees, with the caveat that the calculation is just not that simple. If he is a Sch C filer, then his contribution (if he wants to do 3% for employees), then his contribution is at 3% divided by 1.03 or 2.91% level

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GretaAuthor

Level 7

Business owner wants to contribute more than 3%, he wants to do the max. Is that OK? He sent me the following IRS instruction: "Annually the employer would make a contribution to their own SEP IRA account and to each eligible employee's SEP IRA account. The percentage contributed into each SEP IRA account is the same percentage for the employer and each eligible employee."

abctax55

Level 15

SEPP contributions CAN be a max of 25% of W-2 wages, 3% max sounds more like a SIMPLE.

Which one are you actually talking about? Altho, you can do 3% for the SEPP if ya' want 🙂 Like Susan says, the same %% has to be used for EE and for owner.

And the SEPP for the owner/Sch C actually ends up being just a bit less than 20% of the net Schedule C when you work thru the math (due to SE tax adjustment).

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