S-corp made an excess contribution to the SEP-IRA of its officer/employee for 2009.

IRS article on Web site says that is it to be added to employee’s compensation and if employee does not withdraw it by the extended due date of his tax return, he will have to pay an excise tax of 6% on the amount – presumably he just includes the 5329 in his tax return if he chooses not to withdraw the funds.

I assume this amount is not subject to SS and Medicare taxes and affects only Box 1 on the W-2, correct?

The same article says the employer “MAY” be subject to a 10% excise tax if he makes a contribution he cannot deduct but it appears from the instructions to Form 5330 that there is no “maybe” about it – the tax applies.

Since the contribution can be carried over and deducted the following year (assuming he does not make the same mistake a second time) I presume that on the 2009 return the amount that was added to the W-2 is NOT included in the Officer Compensation on the 1120S – correct? So there are going to be some book-to-tax adjustments to get Schedule L to balance.

But isn’t the shareholder getting stuck twice – it is added to his W-2 and ALSO cannot be deducted by the S-corp so it increases his Sched. E pg 2 pass-through as well. He is not eligible to make a deductible Traditional IRA contribution

Can anybody clear up my confusion?

Margaret A. Stallworthy, CPA