Partnership SEP IRA
My husband is a member in a 2 member LLC taxed as a partnership. The LLC would like to set up a SEP IRA for 2008. There is not a lot of information about setting up a SEP in this situation–it’s easy when it’s one person. I know that the partners are considered employees for the purpose of a SEP and I know the percentage contributed to each partner must be the same. I get into trouble trying to figure out the maximum allowable contribution since this is dependent on self employment taxes for each partner. Both partners have income outside the LLC. My husband has W-2 income, some income from a schedule C, and guaranteed payments as well as his share of profits from the LLC. Since his income is much higher than normal this year, it would be nice to make the highest contribution possible. Thanks
Permalink Submitted by mk foss on Mon, 2008-11-03 03:47
The SEP does not need to be funded until the due date of the 2008 return including extensions. You’re correct in your analysis of the difficulty in determining the maximum contribution when the LLC members have other sources of income subject to social security tax.
You can make a partial contribution now and wait until the LLC return and each member’s 1040 is complete to finalize the contribution. Some people extend their tax returns just in order to have more time to make the SEP contribution; the SEP doesn’t need to be opened before the day that you contribute to it.
Patience is required with these circumstances.
Permalink Submitted by Mary McClelland on Mon, 2008-11-03 04:19
If I understand correctly, I will need to get the Self Employment tax information for both LLC members in order to make the SEP calculation correctly on the partnership return.
To follow up, my husband will also want to make a SEP contribution based on his schedule C income. To make the SEP calculation for each of these do I allocate the Self Employment taxes based on the percentage of self employment income from each source? Does each need to be a separate account or can he have one SEP for both? He set up a SEP last year for Schedule C income.
Another related question that will also expose my ignorance. What is the actual source of funding? The partners/LLC members will receive the bulk of their LLC income as guaranteed payments–they are each being paid for the actual work they do for clients. The partnership income is generated mostly through work done by independent contractors who receive 1099’s and is split equally between the partners. It’s a very small amount compared to the guaranteed payments. The partnership/LLC will create a SEP plan, but does each partner open the his own SEP IRA wherever he wishes?
Thanks so much for responding. We would have done this for 2007, but could not figure how to do it correctly. The consequences of making a mistake are nasty.