Setting up a SEP for a partnership with an employee

Hello,

Thank you for your help.

A CPA firm operating as a general partnership with following situation:

  1. each of two partners takes guaranteed payment and k1 later.
  2. They have one w2 employee

can each partner set up a sep and exclude the employee?

Do we treat each partner as a sole-prop? or treat the entire partnership as an employer?

 

Thank you!



No. The partners must be treated as employees of the partnership.

For tax-favored retirement plan purposes, partners are considered to be employees of the partnership. Therefore, they cannot set up their own plans independent of the partnership based on income from the partnership. Although a partner is technically considered an employee in this context, special considerations apply.
Since a partner doesn’t actually receive a salary from the partnership, retirement plan contributions on behalf of each partner are based on his or her net self-employment (SE) income from the partnership. This is the amount used to calculate the partner’s SE tax bill, reduced by his or her deduction for 50% of SE tax attributable to income from the partnership. The partner’s deduction for 50% of SE tax is reported on page 1 of his or her Form 1040.
Deductible retirement plan contributions made on behalf of a partner (including any elective deferral contributions made by the partner) are not deducted on the partnership’s Form 1065 tax return. Instead, they are reported to the partner on his or her Schedule K-1 from the partnership. The deductible contribution amounts are then written off on page 1 of the partner’s individual Form 1040 tax return. In contrast, retirement plan contributions made by the partnership on behalf of its employees are deducted on page 1 of the partnership’s tax return. Employee elective deferral contributions are included in the salary expense write-off on page 1 of the partnership’s tax return.
In calculating the partner’s SE tax bill (on Schedule SE of Form 1040), the partner is not allowed to subtract retirement plan contributions.

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