First year being a K1. I am a partner in the firm
My K1, form 1065, has Ordinary business income ( Box 1) and SElf Employment Earnings (Box14A).
I opened a SEP IRA at the start of 2021 thinking I could fund the IRA using the BOX 14A as basis.
Fast forward to tax time and I am being told I should not have opened an independent SEP IRA because: Partners or members of an LLC taxed as a partnership are considered employees for retirement plan purposes, and thus cannot have individual SEP plans, according to the IRS.
Is this true?
A SEP-IRA can only be funded by an employer.
If you receive Schedule K1 form 1065, you can contribute to a Traditional IRA if you have self-employed income reported in box 14 of your Schedule K-1.
One of the requirements is that the employer make the same contribution as a percentage of compensation for all eligible employees, including partners in a partnership. This means that the SEP plan must be established under the partnership. The partnership must make the contributions and pass the deductions through to partners using code R in box 13 of the Schedule K-1.
Because the deadline for the partnership to make a SEP contribution for 2021 was the due date of the partnership's tax return, March 15, 2022, it's too late for the partnership to make SEP contributions for 2021.
There is nothing wrong which having opened the SEP-IRA, you just can't make a SEP contribution to it yourself. The partnership can make its SEP contribution to this account for 2022 and beyond should the partnership choose to make SEP contributions.
I have the same question, and was told by TurboTax phone help today that I could take the SEP deduction based on the K-1 (1065) box 14 A Self Employment Income. There is no box 13 amount for a retirement plan established by the Partnership. I am a limited partner with material participation if that matters.
TurboTax is allowing the deduction based on that income flowing to the sched SE Self Employment Tax computations. It’s even calculating a max SEP contribution based on this box 14 A income. I have a small amount of Schedule C income but the magnitude of the maximum deduction suggests it can only be coming from the K-1 box 14 A self employment income.
I would say there is an error in the program if this deduction is actually not allowed.
@Frabs , the plan must be established under the partnership and the contribution percentage of all partners must be the same. You cannot independently contribute to any employer plan with the partnership self-employment income. You can us the self-employment income to support a regular IRA contribution to your personal IRA.
Thanks for the reply @dmertz
I saw the reference you provided and thought that was definitive, until I started researching further and wasn't sure. For example:
https://www.irs.gov/faqs/small-business-self-employed-other-business/entities/entities-1 "Partners in a partnership (including certain members of a limited liability company (LLC)) are considered to be self-employed, not employees, when performing services for the partnership."
And
https://www.irs.gov/pub/irs-pdf/p560.pdf when discussing SEP IRA plans: Net (self employment) earnings include a partner's distributive share of partnership income or loss (other than separately stated
items, such as capital gains and losses)"
Thanks
For the purpose of reporting the partner's income and retirement contributions, the partner is treated as self-employed and the partnership is disregarded. However, for the purpose of actually making the retirement contributions, the partnership is not permitted to be disregarded.