qualifying to do a SEP-IRA contribution

Does my wife qualify to contribute to a SEP-IRA? She works for me part-time and gets a salary of $45,000 annually. She is not considered an “employee”, but instead “self-employed”. I give her a 1099-NEC and code her income in box 1 as nonemployee compensation. My accountant puts this on a Schedule C when filing our joint return 1040. I personally max out my SEP-IRA at $58,000. Am I correct that she will be allowed to contribute 25% of the $45,000 into a SEP-IRA ($11,250)? She doesn’t deduct any expenses on the Schedule C, so net profit is the full $45,000. Thank you!



It is not proper in these facts and circumstances to classify a spouse as an independent contractor. They can not possibly meet the; IRS Behavioral Control, Financial Control and Relationship of the Parties requirements to be classified as an independent contractor.
Even without the above, not having any expenses, would be another massive red flag of employee misclassification.
Notwithstanding employee misclassification, your business and her business would be considered a Controlled Group. The tax code and IRS regulations consider the two of you one employer for employer retirement plan purposes.
Not only can, she must be subject to the same maximum employer contribution rate as you.
Also, both you and her do not base you SEP IRA contributions on your business profit, but rather business profit – 1/2 SE tax.
Finally, maybe you should consider a new CPA.

Also, the multiplier that self-employed use is 20% of the (Net Profit from Schedule C  –  1/2 SE tax), not the 25% you cited in your example. There is a way to use 25% in the calculation.  But to make it work out correctly, you need to realize that the SEP contribution “by the employer” must be subtracted to determine the effective employee earnings.  Do this subtraction correctly, and you end up with the same maximum employer contribution as was obtained much more directly using the 20% factor.

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