SEP IRA for Self-Employed Independent Contractor
How does a a self-employed person acting as an independent contractor for a company typically create a SEP IRA? Can it be setup only for the indivudual and not through the company for which the individual is acting in an independent contractor basis? If setup for the individual there would technically be no employer and no other employees. If this can be done, how should form 5305-SEP be completed? Specifically, what should the person write as the employer on the form?
Any advice is appreciated.
Thank You
Permalink Submitted by Jose Morales on Fri, 2009-04-10 16:05
The term “SEP IRA” is a misnomer. What you really will have is a Traditional IRA in wich SEP Contributions are made and titled as a “SEP IRA.”
The Employer does not establish the IRA accounts in cases in which you have a “true” employer with multiple employees. The individual employees would each establish their own IRAs and the employer would then make SEP Contributions to those IRAs. The individual employees would not be making the SEP contributions, however they could still make traditional IRA contributions.
When you are an independent contractor or sole proprietor you are the employer and the employee. You would still open an IRA account as an individual, not as the employer. Unlike the above, you can make your own SEP contributions because you are self employed.
Form 5305-SEP is the SEP IRA Contribution Agreement. This is the form that the employer would complete listing the eligibility requirments for receiving a SEP contribution from the employer, which is to be provided to all employees for each year a SEP contribution is to be made. Since you are the employer and the employee, this is your “contract” documenting the SEP contribution that you will be making to yourself.
It can be a bit confusing.
Permalink Submitted by Bryan Evoy on Fri, 2009-04-10 16:19
Thanks for the info urusei2. Your explanation was consistent my general understanding. Your response was a good explanation and clarification. For form 5305-SEP, would I just put the individual’s name in the line asking for the employer since this self-employed individual would be both the employer and the employee?
Thank You
Permalink Submitted by Jose Morales on Fri, 2009-04-10 16:31
yes, you would list the individual as the employer on the 5305-SEP form.