S Corp limits of SEP

[Looney1966]

I am the sole owner and employee of a 1120S and draw an annual salary of $12,500.  My net profit fluctuates from 250K to 350K every year on my K1.  I normally will take about 200K in distributions each year.  I have a SEP that I personally contribute the max each year, based on what my CPA told me in the past. My CPA has always taken the deduction on my personal taxes. Last year on my personal taxes ( in 2022 it was $61K) they took as a deduction on my personal taxes and that was the total I contributed personally.  I recently was talking to  another CPA and they told me that I was misinformed and that the max that I can contribute is 25% of my compensation (W2) not any profits from the S Corp or any distributions I take from the business, those do not count.   I am working on my own return in Turbo Tax but need guidance on what is correct.  Can someone advise me on the max contribution and if I can take it as a deduction on my personal taxes?

[MinhT1 · Accepted solution]

Your second CPA is correct.

You are an employee of your S-Corp and the S-Corp's maximum contribution to your SEP-IRA is the lesser of 25% of your remuneration or $63.000 for 2023 ($61,000 for 2022). In your case, it would be 25% of $12,500 or $3,125.

Please read this IRS document for more information.

Your first CPA was applying the rules for a self-employed individual which apply for a sole proprietor or a working partner in a partnership or limited liability company.

Please read this IRS document for self-employed individuals.

Your S-Corp has made excess contributions to your SEP-IRA in the past. To correct this, please follow the instructions in this IRS document.

[Rick19744]

You were misinformed by the first CPA.....and significantly over funded your SEP.

Your 2nd CPA is correct.

The pass-through income on your S Corp K-1 is not considered earned income, and as a result, only the income reflected on your W-2 is considered for the SEP contribution.

Now you need to fix the over funded plan and the 2nd CPA appears to be the individual to help in this matter.

Additionally, while you are meeting to fix this issue, you need to have a discussion with the new CPA on what would be considered "reasonable wage".

Based on the limited facts, if you were selected for audit by the IRS, I believe they would challenge the current wage to distribution ratio.

[Mike9241]

if the plan was a SARSEP established before 1997,  the corp can continue to maintain it and new employees hired after December 31, 1996, can participate in the existing SARSEP. The introduction of SIMPLE IRA plans is intended to fill the need for retirement plans like SARSEPs.

SARSEPS followed 401(k) contribution limits.

However, your low wages in relation to income and distributions is a tax issue for which you need professional advice. 

[Looney1966]

There are no other employees, never will have an never will have any more.  I understand your concern on low wages, I am taking care of that going forward.  My issues is the SEP contributions, if they are legit and if I can take on my personal taxes.  They have always been paid by me personally and my previous accountant has always deducted the max on my personal tax return. I will have to see what type it is.  Can you clarify what a SARSEP is?

[Rick19744]

Was your plan established before 1997?

If it wasn't, then you clearly don't have this type of plan.