SEP Contribution for One & Not The Other
A CPA contacted me today with the following situation. The CPA has a sole proprietor who files her profit on a Schedule C. She paid her husband $325,000 in a W-2 wage in 2009. It is her company and he is the only employee. The CPA would like to make the maximum contribution of $49,000 for his 2009 SEP contribution. However, if the CPA does this that will basically leave no profit in the company and therefore the wife will have no money for her SEP contribution since her Schedule C will show a loss or break even. The question is can the CPA max fund the husband’s SEP and not fund the wife at all? Or does there need to be some kind of contribution for the wife?
Thanks in advance for your response,
Todd
Permalink Submitted by Martin Helmer on Sat, 2010-04-10 04:42
While a contribution for the sole proprietor can’t be waived, the amount in this case will be little or nothing. For the W-2 employee, maximum allowable SEP compensation is $245,000, so his contribution rate is 20% to get to the $49,000. So the sole proprietor’s allocation is 1/6 times (net income from self employment minus 1/2 S.E. tax). See Publication 560, page 23 to confirm the 1/6 rate. If that result is zero, that’s ok.