SEP IRA Contribution limit for S-Corp

Submitted by PETKO YAKMADZHIEV on Thu, 2023-04-06 14:29

A 100% S-Corp owner wants to make an employer SEP contribution, which can be no more than 25% of W-2 wages from the S-Corp. Box 1 of his W-2 includes $7000 of health insurance premiums and $3650 of HSA contributions paid for by the S-corp, neither are subject to fica or medicare tax. Is the 25% employer SEP limitation based on Box 1 wages, or is it limited to wages subject to fica and medicare tax indicated in boxes 3 and 5? IRS publication 560 ,chapter 1 suggests that these fringe benefits can be included for calculating the contribution limit and my CPA is of the same opinion, however an IRA specialist I spoke to contradicted that notion saying that if the fringe benefits resulted in an adjustment elsewhere ( in my case they are deducted on the corporate return) then those fringe benefits cannot be included for purposes of calculating the contribution limit and boxes 3 and 5 of the W-2 ( income subject to social security and medicare wages ) should be used instead. Could you please clarify this as I have been using box 1 for two years and don’t know if I should be correcting excess contributions as well as what to do going forward?



Submitted by Alan - IRA critic on Thu, 2023-04-06 19:01

You and your CPA are correct. Box 1 is the taxable comp for SEP IRA contribution purposes (subject to the dollar limit) without any need to reduce it to the Box 3 and 5 figures. Taxable comp refers to taxable for income tax purposes, not SS/Med purposes.



Submitted by PETKO YAKMADZHIEV on Tue, 2023-04-11 20:54

Thank you,Alan for your answer.I did convey it to the IRA consultant ,who insisted that as a self employed individual I cannot use the fringe benefits and below  is an excerpt from an IRS publication that he sent me in response.Does this change anything in your view? He’s saying that beacuse the fringe benefits were deducted on the corporate tax return and I’m the only employee ,I should exclude them from the contribution limit calculation.I’m really torn here,please advise if the below paragraph changes anything for you!”Net earnings from self-employment. For SEP and qualified plans, net earnings from self-employment are your gross income from your trade or business (provided your personal services are a material income-producing factor) minus allowable business deductions.    — 



Submitted by Alan - IRA critic on Tue, 2023-04-11 23:04

But an S Corp shareholder is not considered self employed, they are employees of the corporation and the “compensation” on which SEP contributions are based is W-2 Box 1 income rather than net earnings from SE. The “minus allowable business deductions” issue does not apply to S Corp shareholders. 



Submitted by PETKO YAKMADZHIEV on Wed, 2023-04-12 14:30

Thanks again ,Alan.Here’s the other IRA consultant’s reply when presented with our latest excahnge here ,on this forum:”The statement below that an owner employee of an S corp is not self employed is completely false.If someone owns a company and the company pays them, they are self- employed. They own the corporation that employs them.” Any thoughts ?



Submitted by William Tuttle on Wed, 2023-04-12 14:54

  • Get a different accountant. This one is incompetent.
  • A self-employed individual is well defined in the tax code and IRS regulations.
  • The definitions only apply to sole proprietors filing Schedule C and active partners in a partnership receiving a Form K-1 (Form 1065).
  • They both file Schedule SE and pay self-employment taxes.
  • An S Corporation 2% shareholder-employee is a W-2 employee paying FICA taxes and receiving a Form K-1 (Form 1220-S) for ownership distributions.
  • No SE taxes, no self-employment.
  • What an S Corporation has in common with a sole proprietorship and a partnership. They are all pass-through income taxation entities. All income is passed through to the individual’s personal Form 1040 subject to ordinary income taxes.


Submitted by PETKO YAKMADZHIEV on Wed, 2023-04-12 16:31

This was an IRA consultant from a company that’s setting up a Solo401K for me, not my CPA.But,I get your point.Thanks for the answer.



Submitted by William Tuttle on Wed, 2023-04-12 20:00

  • Why are you dealing with a consultant to set up a one-participant 401k. It is relatively straightforward to adopt one thru mainstream brokerage providers.
  • It is seldom a good idea to set up retirement accounts thru a captive advisor and provider. They are typically less than optimal and highly likely to have excessive fees.
  • The lack of such basic knowledge on business entity structures, leads me to believe you are being sold something.


Submitted by PETKO YAKMADZHIEV on Thu, 2023-04-13 03:08

The main stream  Solo 401K accounts don’t offer the features I’m after.Like Roth and After-tax contributions and conversions.Their fee is flat ,it’s not high and they have very good feedback dating back quite a few years.Besides the  actual funds and investments will be held at Fidelity,in investment only accounts.



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