SEP-IRA contribution by self-employed Sch C

[Greta]

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?

[sjrcpa]

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.

[dd4vols]

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

[Greta]

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]

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).

[Greta]

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?

[sjrcpa · Accepted solution]

"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]

You have quoted the rule. It has to be followed.

[Accountant-Man]

No. 20% maximum for himself is 25% maximum for employees, ASSUMING THEY QUALIFY.

No mention yet that all or any employees qualify for SEP IRA.

[Greta]

Thank you! They apparently do not qualify, having been with employer less than 2 yrs. So best to do maximum in 2022 for employer only, and see how 2023 pans out.

[abctax55]

Double check, as I'm going on a vague memory.....  I'm not sure the 2 year/3 year as an employee rule applies for the initial year.    The administrator of the plan should know.

Maybe I've just had too much spiced eggnog tho 🤔

[rbynaker]

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@abctax55 wrote:

Double check, as I'm going on a vague memory.....  I'm not sure the 2 year/3 year as an employee rule applies for the initial year.    The administrator of the plan should know.

Maybe I've just had too much spiced eggnog tho 🤔

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https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps

"Are the eligibility requirements the same for all employees in a SEP plan, including owners?

Yes. The eligibility provisions stated in the SEP plan document must apply equally to owners and employees."

If the business was just started this year and the owner picks a 2-year experience requirement then the owner is likely ineligible.

[abctax55]

Wow... the memory isn't totally shot.  Yet... thanks Ric.

[TaxGuyBill]

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@abctax55 wrote:

Maybe I've just had too much spiced eggnog tho 🤔

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I didn't realize there was such thing as "too much".  😂

[abctax55]

Bill... too much nogg, or too much spice ?  Both ?

[Accountant-Man]

In 2023, the qualification is 3 years and at least $650* in wages each year.

*Probably $650, could be more, but I doubt it.