Single Member LLC and spouse SEP

Submitted by Lars Erickson on Sun, 2018-03-04 17:14

I own two single member LLC businesses (I am the sole member), and want to establish my first SEP. Several questions. The 25% I am able to contribute (subject to cap) is based on the combined net profit of the two businesses, correct? I have seen and am aware of the convoluted formula that needs to be used when calculating the contribution for an owner, so my using the simple 25% reference is an easy way to talk about this. Second, I would like to create a separate SEP for my wife also (she is not a member of either LLC). If I do that, can I a make an additional, equal contribution for her SEP (essentially contributing up to 50% of schedule c income), or would I still be limited to the 25%, and we’d have to split that 25% (essentially contributing 12.5% each)?

Third, I have a third business, I am a designated “trader” of stock/equities (designated “trader” by the IRS). For taxes, that means that the expenses of trading are reported on a schedule c, but the income is reported on form 4797 (acquisition and sale of capital assets), and since the 4797 income minus the schedule c expenses results in a profit, can I also use this income in calculating what I am allowed to contribute to my SEP? As a note, because the income is not shown on schedule c, it is not subject to SS/FICA taxes, and is not “earned income”.

Thank you!



Submitted by William Tuttle on Mon, 2018-03-05 01:21

  • The maximum you can contribute to a SEP IRA for 2018 is the lessor of 25% of compensation or the $55K annual limit. For the self-employed this is calculated as 20% of net self-employed earnings (business profit – 1/2 SE tax). You would need $275K of net self-employed earnings to contribute the $55K.
  • A one-participant 401k would be a better option. It allows you to make elective employee contributions of up to 100% of net self-employed earnings not to exceed $18.5K for 2018, plus the same 20% of net self-employed earnings employer contribution. The combined total not to exceed the lessor of 100% of compensation or the same $55K. This allows you to make the maximum contribution on only 182.5K of net self-employed earnings.
  • Only legitimate employees with earned income can make elective employee contributions and/or receive employer contributions. Your wife would have to have legitimate job tasks and paid a Fair Market Value (FMV) wage for only the number of hours required to perform those tasks. Any elective employee contributions must be deducted from her W-2 net pay and any employer contribution would be limited to 25% of W-2 compensation.
  • Even if you were to add her as an LLC member and file taxes as a partnership or elect Qualified Joint Venture (QJV) status. She would have to meet material participation requirements. NOTE: QJV status is only allowed with LLCs in a community property state. Also, the 25% of compensation limit is on the employer’s total compensation paid. No double dipping there.
  • The trader income is unearned income and not from an employer. It can not be used for any retiremnt plan contributions.

Submitted by John Papa on Tue, 2021-01-19 22:44

I have a client that his CPA had us set a SEP account through his client’s S Corporation in years prior to 2020 and taxpayer made contributions to the SEP account based on S Coporation Income prior to 2020.  In 2020, he had no income in the S Corporation, however had income in his Single Member LLC.  The CPA believes that since there is common ownership of 100% in both the S Corporation (no other shareholders) and the Single Member LLC, based on the LLC income the CPA wants the client to contribute to the S Corporation SEP rather than create a separate SEP under the Single member LLC name.   Can this be done and it there any special form to complete or disclosure or Election that should be made on the tax return 1040 or S Corporation. My research yielded no specifics for this situtation.  Thank you for your assistance and any authoritative literture would be helpful..

Submitted by David Mertz on Wed, 2021-01-20 00:17

SEP-IRAs are established in the name of the participant, not in the name of the company.  Nothing in the tax code ties a particular SEP-IRA to a particular company.  Even if it did, in this case the S corp and the single member LLC appear to be a controlled group which must be treated as a single employer with respect to their joint retirement plan so, in effect, they are the same company with respect to the plan.

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