SEP IRa
HI:
I have a prospect who has earned approx. 550k for 2021. He does not currently have a retirement plan and he is a “C” Corp. He is the only employee and isn’t married. He would like to max out for 2021 (contribute 58k to SEP). He hasn’t paid himself yet this year and will do so before end of December. After reading on the IRS website, IRS states:
SEP contributions are limited to smaller of 58,000 or 25% of compensation, limited to $290,000 compensation in 2021. If you take 25% of 290k it is $72,500. Why is 290k even used? If you multiply 290k by 20% it equates to 58k.
Can you please explain this?
Permalink Submitted by William Tuttle on Wed, 2021-12-15 03:24
It is because a self-employed individual’s employer contribution is calculated as 20% of their self-employed earned income (net earnings from self-employment) = business profit – 1/2 SE tax. 20% of $290k = $58K.
Since employer contributions are not compensation, the employer contribution reduces their $290K earned income by the $58K employer contributions = $232K. Note: $58K is 25% of their $232K compensation.
This is equivalent to a W-2 employee with $232K in compensation and the employer making a 25% contribution of $58K = $290K.