SIMPLE IRA – LLC Owner tax deduction

Submitted by John Theys on Sat, 2019-09-14 19:28

I am the owner of a LLC with 5 employees. I will setup a new SIMPLE IRA for 2019 this month. I receive guaranteed payments for services rendered and need to understand the company tax deduction for the matched contribution. Is the 3% matched company contribution considered a company deduction for both employee and owner contributions? And does my personal contribution need to come from a payroll deduction or can I simply submit a contribution by April 15th just like a TIRA? Earnings will easily exceed my contribution.



Submitted by William Tuttle on Sun, 2019-09-15 18:19

By default the IRS considers an single member LLC to be a disregarded entity (sole proprietorship) for tax and retirement plan purposes. There is no difference between the income of the LLC and the individual. You can certainly take money from the LLC periodically (sometimes called draws), but there is such thing as guaranteed payments in a sole proprietorship. Your 3% match is based on your self-employed earned income (business profits – 1/2 SE tax) and neither the employee deferrals or the 3% employer contributions are deductible to the business. They are deducted on Form 1040, Schedule 1, Line 28. SIMPLE IRA employee deferrals must be made by 1/31, while you have until your tax filing deadline (4/15) including extensions (10/15) to make the employer match. After all, you do not know your self-employed earned income until your file your taxes.

Submitted by John Theys on Mon, 2019-09-16 21:16

Thank you for your response. As stated, this is not a single member LLC. There are multiple members who work for the company along with additional employees. My question is whether the company matched contribution for the Members is a company tax deduction along with the employee matched contribution. This will obviously result in a lower company profit which would also lower my self employment taxes for the year.

Submitted by alberto vega on Mon, 2019-09-16 22:13

If there are more than one owner of an LLC (or more than 2 owners if Husband and wife), you must file a partnership tax return and apply different rules for deductibility or not of  SIMPLE IRA. You are not a sole proprietorship if you have more than one owner of an LLC if your wife is not an owner.

Submitted by William Tuttle on Tue, 2019-09-17 02:34

  • “As stated, this is not a single member LLC” How does “I am the owner of a LLC” state that this is not a single member LLC?
  • A default multi-menber LLC is also treated by the IRS as a disregarded entity, but considered a parrtnership.
  • Employee elective deferrals and the employer match must be made by the partnership and passed through to you on your Form K-1 (1065). They are not deducted as partnership business expenses. That is only true for W-2 employees. However, you are still a self-employed individual and your contributions are based on your self-employed earned income*. As I also stated in my previous post, the contributions of self-employed individuals are deductions on their personal Form 1040, Schedule 1, Line 28. All of this well explained in the IRS Form 1065 Instructions.
  • *Correction to my previous statement about self-employed earned income. I am used to giving the calculation for self-employed individuals making one-participant 401k or SEP IRA contributions. However, a SIMPLE IRA uses a different formula. From IRS Publication 560:
  •  “If you are self-employed, compensation is your net earnings from self-employment (line 4 of Short Schedule SE (Form 1040), or line 6 of Long Schedule SE (Form 1040)) before subtracting any contributions made to the SIMPLE IRA plan for yourself.”
  • See Chapter 5 for how to calculate your employer contribution. You should really use tax software for this calculation. Many online calculators get this wrong.

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