eligibility for sep contribution
wife provided services to husband’s schedule c in year 1. she did not receive payroll checks and did not receive a form w-2. in year 2, wife became employee of husband’s schedule c and received regular payroll checks, net of appropriate payroll tax withholding, and received form w-2. wife provided services to husband schedule c in year 2. sep has 1 year out of previous 5 years service requirement. can wife receive credit for service in year 1, even though she didn’t receive payroll checks or w-2 in year 1, for purpose of satisfying eligibility requirement in year 2 to receive sep contribution for year 2? see section 408 (k) (2) (B).
individual (not wife) was independent contractor for the schedule c referred to above. individual provided services to schedule c in year 1. individual became employee of the same schedule c in year 2, received regular payroll checks, net of appropriate tax withholding, and form w-2. does this individual receive credit for services rendered to schedule c in year 1 to allow this individual to meet eligibility requirements in year 2 and receive sep contribution for year 2?
Permalink Submitted by mk foss on Thu, 2011-10-06 20:52
Employees must be covered when a SEP arrangement is in place when they meet the eligibilty requirements. In this case, I don’t think either the wife or the former independent contractor qualify. In year 1 neither of them were employees. I don’t think that performing services without compensation makes you an employee for any other provisions of the tax code or for social security coverage.
Permalink Submitted by chris shamel on Thu, 2011-10-06 21:26
408 (k) (2) (B) refers to employee who performs service. code is not clear if person is required to receive compensation or was not employee at the time of providing service.
Permalink Submitted by Martin Helmer on Thu, 2011-10-06 21:34
The wife gets credit for 1 prior year of service in year 1, since the statute speaks of ‘performing service’ and doesn’t mention any compensation requirement. Once a person has met the prior years of service for eligibility requirement, if any, most plans require a minimum of $450 earned in the current year in order to be eligible to receive a contribution.
The contractor’s prior service would count if it met the leased employee rules under 414(n).
If you’re really wanting to cover everybody, you can amend the plan by the extended due date of the business tax return to have it specify that zero prior years of service are required.
Permalink Submitted by chris shamel on Fri, 2011-10-07 00:15
i don’t think the independent contractor is considered a leased employee under 414(n). client would like to give service credit to his wife but not give credit to the independent contractor. client doesn’t want to give a contribution to anyone (other than spouse) if he doesn’t have to.