SIMPLE IRA salary deferral deadline for self-employed

Submitted by Ben Lipschitz on Thu, 2019-05-23 17:38

How to resolve the SIMPLE IRA rules below for the following situation:
Many businesses do not know their net schedule C until close to their tax filing deadline, so if a business has revenue of say 13k, the owner/employee wont know the salary deferral maximum in time for the Jan 30 deadline. Is the resolution that a business like that will need to compute their net schedule by Jan 30?

Copied from https://www.irs.gov/retirement-plans/simple-ira-tips-for-the-sole-proprietor:
>>When must I deposit the contributions I make for myself to my SIMPLE IRA?
You must deposit your salary reduction contributions within 30 days after the end of the tax year. For most people, this means salary reduction contributions for a year must be made by January 30 of the following year.
>>What is the maximum contribution I may make for myself to my SIMPLE IRA?
>Salary reduction contributions
You may defer up to $13,000 in 2019 and $12,500 in 2018 (adjusted for cost-of-living in later years). However, you may not exceed your net earnings from self-employment from the business sponsoring the SIMPLE IRA plan. If you are age 50 or over, you can make a catch-up contribution of up to $3,000 in 2019 and 2018 (adjusted for cost-of-living in later years).



Submitted by David Mertz on Thu, 2019-05-23 19:49

  • Section 408(p)(5)(A)(i) requires that the elective deferral contribution to a SIMPLE IRA be made by January 30.  I don’t see why a sole-proprietor who keeps proper business records would not have the information necessary on January 1 (or at least earlier than January 30) to determine net profit and to determine if their intended elective deferral will be limited by net profit.
  • For someone who for some legitimate reason cannot determine net profit before January 30, perhaps a 401(k) plan would be an appropriate choice instead of a SIMPLE IRA plan.

Submitted by Alan - IRA critic on Thu, 2019-05-23 20:55

  • Yes, technically they are subject to the 1/30 deadline for salary reduction contributions even though they don’t actually draw a salary.  This quandary has been under debate since 1998, but remains unresolved, but also mostly unenforced by the IRS or DOL. Granted, many Sch C filers fall under the max SIMPLE IRA dollar limit so they do not need to determine their net earnings from SE and have no problem making the contribution by 1/30. In other cases, where accounting firms are already doing their books, the net earnings can actually be determined in time to make the contribution by 1/30. In a few other cases with no additional employees, the participant elects a dollar contribution amount rather than a % of compensation in the form of net earnings. In those cases the exact amount of net earnings need not be determined by 1/30, but of course the dollar amount cannot exceed the net earnings once determined.
  • Obviously, the IRS knows that even though non salary net earnings must be treated as salary reduction contributions per the tax code and Notice 98-4, in practice this is not practical in many cases. However, as in many other analagous situations for which needed guidance has not been forthcoming, enforcement has instead been relaxed. The business owner should work this problem out with their tax preparer. Perhaps they should consider a solo K in 2020.

Submitted by David Mertz on Thu, 2019-05-23 23:48

  • Only the elective deferral has to be made by January 30.  The deadline for making the employer matching or nonelective contribution is the due date, including extensions, of the tax return.
  • The only time there is a question about the maximum permissible elective deferral is when the net earnings end up being between $0 and the overall maximum elective deferral limit (with catch-up if age 50 of over).  With no net profit, no elective deferral contribution is permitted.  With net earnings above the overall elective-deferral limit, the maximum elective deferral is permitted.  Outside this range the actual net earnings or net loss need not be known in order to determine the permissible elective deferral.

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