SEP contributions for self employed and LLC

Submitted by Douglas Bauerband on Thu, 2020-04-02 15:02

Little confused on contributions;

Contributions for employees can equal as much as 25 percent of their gross annual salary, and contributions for business owners can amount to 20 percent of their net adjusted annual income from self-employment. The maximum amount for both employees and employers is $56,000 in 2019.

a. is a self employment the same as an LLC?

b. in an LLC, is not the owner and or partners considered employees?

c. Can a LLC owner (with no employees) contribute 25% of his gross to his SEP?

d. Or is he only allowed to do 20% of his net as he is considered self employed?

e. If he contributed 25% of his gross in Dec. 2019 ($15,000) and was only allowed 20% of his net, which would have been around 7-8k, can he have the investment company re-code the sep contribution to 7K for 2019 and 8k for 2020?

Apologize if too many questions.

Thank you for any help in clarification.

Douglas
Stay positive in this time of uncertainty.



Submitted by William Tuttle on Thu, 2020-04-02 16:59

  • a. An LLC is a state chartered business entity, it is not a federal tax status. By default an LLC is considered a “disregarded entity” by the IRS. By default a simple member LLC is considered a sole proprietorship and files a Schedule C/SE. By default a multimember LLC is considered a partnership and files a Form 1165/K-1 and Schedule SE. Any LLC electing subchapter ‘S’ treatment is considered an S-Corporation and files Form 1120S/K-1 and pays its 2% shareholder-employees on a W-2.
  • b. In self-employed entities, owners are considered “employees” for retirement plan purposes, but are not considered W-2 employees. Special calculations are required for employer contributions.
  • c/d. The maximum employer contribution to a SEP IRA or 401k may be 25% of compensation and W-2 employees receive 25% of their W-2 Box 1. However, a self-employed employer contribution itself reduces compensation, Therefore, the maximum employer contribution must be calculated as (business profit – 1/2 SE tax) * 20%.
  • e. No, this would only have been possible if the contribution was actully made in 2020 before the tax filing date including extenstion. This is an excess SEP IRA contribution and must be removed with earnings by your tax filing deadline including earnings. If this is not done a correction process will be required including a 10% excise tax and additional form filings.

This is not an uncommon occurance for the SEP IRA custodian. Contact them and ask them to remove the excess contribution and earnings. The earnings will be taxable in the year of contribution and the excess contribution is not deductible.

Submitted by Alan - IRA critic on Thu, 2020-04-02 17:13

spiritrider, good thing you are here to answer these.

Submitted by William Tuttle on Fri, 2020-04-03 01:23

You are only one person and the volume is getting insane. I try to answer the subjects that I have a good grasp of. Esecially, ones you triage initially. You have more than enough to do with the subjects that are in your wheelhouse.

Submitted by Douglas Bauerband on Thu, 2020-04-02 19:03

since the contribution arrrived on Jan 2, 2020 the investment coded it for 2020.According to your statement in your answer below:No, this would only have been possible if the contribution was actully made in 2020 (not 2019) before the tax filing date including extenstiona. does this mean the investment company can recode the SEP portion for 2019 and then 2020?b. or do they still have to take out a portion before the tax deadline?c. Isn’t a SEP IRA the same as an IRA (not simple) and you can fund the SEP prior to the tax deadline for the previous year?d. The investment company is stating that they cannot put back the contribution to 2019 since IRS rules state they must code it for the year when it arrives…is that correct?thank you again,Douglas 

Submitted by William Tuttle on Fri, 2020-04-03 01:19

This new information is the best circumstance possible. This is one time a few days of procrastination pays off. For future reference, you should not try to maximize your contributions before the end of the year. I suggest making not more than 75% – 80% of your calculated contributions before the end of the year. As I pointed out, you have until your tax filing deadline including extensions of the following to make your employer contributions. 

  • The SEP IRA custodian only records the contribution in the year it was made and reports this on Form 5498.
  • The tax year of contributions between 1/1 and the tax filing deadline (including extensions) are determined by the tax year you deduct the contribution.
  • All you need to do is deduct the the maximum allowable amount for 2019 and by default the remainder applies to the 2020 tax year.
  • The will be no excess contribution.

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