SEP deduction

Technical topics regarding tax preparation.
#1
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Client is a veterinarian, owns 100% of S-Corp for her business, takes $143,000 per year as salary. S-Corp has $256,069 as line 21 ordinary business income. What can she contribute to a SEP? IRS says limits are 25% of "self-employment" income. She does not file a Schedule C, but could the ordinary business income from the 1120-S possible meet that criteria? I would appreciate any insights, as always. Thank you.
 

#2
sjrcpa  
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No. In a corporation the SEP is computed as a % of wages.
 

#3
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Corp owners are eligible a SEP contribution of 25% of their W-2 box 5 income, subject to the annual limit.

If this is the client's only job, consider a Solo 401k for potentially higher contributions due to the employee deferral. The only wrinkle is the Form 5500-EZ once plan assets reach $250k.
 

#4
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Thank you for the quick responses. By my calculations, she could then contribute $35,750 (25% of $143,000) to a SEP and also $62,500 to a solo 401(k)?
 

#5
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mikestaxes55 wrote:Thank you for the quick responses. By my calculations, she could then contribute $35,750 (25% of $143,000) to a SEP and also $62,500 to a solo 401(k)?


No solo K if she has employees. Employee must be in SEP calculation as well……. Although there my be a vesting period for the SEP.
 

#6
novacpa  
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Self Employed also may contribute to limit of $61k "profit sharing plan" read IRS Examples.
 

#7
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southparkcpa wrote:Employee must be in SEP calculation as well……. Although there my be a vesting period for the SEP.


Maybe not. You can choose 3 years of service (max) for SEP eligibility. Might be handy if the employee hasn't been around that long.

For a Solo, employees are eligible after one year of service with more than 1,000 hours, or three years of service with at least 500 hours each year. At that point the plan would need to terminate or convert to a "regular" 401k.

mikestaxes55 wrote: By my calculations, she could then contribute $35,750 (25% of $143,000) to a SEP and also $62,500 to a solo 401(k)?


That's not correct. You have some reading to do.
 

#8
JR1  
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Read, get educated. A vet surely has other employees, so that factors in big time. He/she will have options....the trouble is that those options are limited after year end. Any 401k's are part of payroll processing. Simple plans must be implemented by Oct. 1? 31? Only SEP's can be after the fact, but everyone must be covered the same way....as MvT says above.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#9
CathysTaxes  
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See publication 560.
Cathy
CathysTaxes
 

#10
JR1  
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Actually, some of the best summaries I've seen came from Edward Jones. Call a local office and ask for it.

But you've not covered this in a seminar? TaxBook, Quickfinder will also have nice summaries.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#11
TheGrog  
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There is an option for a cash-balance plan, but those are really weird.
 

#12
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Never had this issue come up in a seminar, but thanks for all the insights - I will definitely check Pub 560.
 


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