SEP Contribution for S Corp Owner

[deanna-tomasetti]

My husband is an S Corp Owner and has contributed to his SEP IRA.  A CPA that we typically trust said that the max he can contribute to the SEP is 25% of the W-2 compensation that he gives himself from the business, PLUS 25% of the business income (box 1 of K-1).   I can't seem to find anything that confirms that.   If that's not possible, it seems his retirement contribution will have to be much lower than we'd both like.

I'm also wondering if the full SEP contribution has to be applied to the S Corp tax return, or if it can be deducted from our personal return.    I can't seem to make that work with TurboTax, so maybe it's not possible.  I believe we would have a greater benefit if it was deducted form the personal return.

Any insight?

[AliciaP1]

Your husband can elect to contribute up to 25% of his W-2 wages to a maximum of $58,000 for 2021 and this is reported on his W-2 if the plan is written to be funded by a salary reduction arrangement.  If there is no arrangement, the contribution qualifies for the limitations for the IRA deduction on your personal tax return. 

The contribution needs to be funded to the SEP-IRA before the filing deadline for the 1120S (including extensions).

[deanna-tomasetti]

Thank you.  It's either 25% of w-2 wages or $58K, whichever is less.  Right?  The salary he pays himself from the S-Corp is low so that 25% of of w-2 wages is not much.   

I don't think there is an arrangement since the SEP contributions don't come out of his paycheck.  I tried to enter SEP contributions on our personal return in Turbo tax, but it didn't seem to work.   I've read that Turbo Tax doesn't give you that option if there isn't a Schedule C.  Do you know if that's the case?    He has no Schedule C because he's an S-Corp.

I appreciate your help.

[AliciaP1]

That is correct.  Per the IRS:

The contributions you make to each employee's SEP-IRA each year cannot exceed the lesser of:

1. 25% of compensation, or
2. $61,000 for 2022 ($58,000 for 2021; $57,000 for 2020 and subject to annual cost-of-living adjustments for later years).

You state that the salary he pays himself is low, but those wages would have to exceed $232,000 for the $58,000 to be the "lesser" amount.  So, he is limited to 25% of his W-2 wages for 2021.

SEP contributions are a business transaction.  If you do not have a "business return" to report with your personal return (so a Schedule C) you do not enter this amount on your personal return.

[deanna-tomasetti]

Thanks again.  

He is the owner of his business (S-Corp), so the form 1120 generates a K-1 that gets reported on our personal return.

[ErnieS0]

You would be able to contribute to a SEP plan as an S-Corp.

Refer to How are SEP contributions reported for a S Corporation? What is shown on the 1120S form? What is sho...

[Sam Hopi]

Hi , Assume my reasonable Compensation or W-2  as sole owner of S-Corp for all year would be $85000. Let me know, are health insurance premium, SEP contribution a kind of most of fringe benefits included in $85000. If yes, net pay can be reduced when I get my paystub. 

Questions: 

If I want to do contribution through Fidelity, my max SEP contribute is 25% * 85000=$21250 so can I contribute gradually by each paystub?

Can I contribute in 2024 before March 15 for 2023 tax return in lumpsum from my personal checking account? or should pay directly from S-Corp checking if so but I confused about my paystub and my W-2 that dose not show anything for this contribution?

And what can I say to payroll provider to handle for this contribution which I am going to make in Fidelity, what box of my W-2 should be affected indicated for this contribution?

And what happens on federal tax withholding for box 2? Should I tell them, payroll provider.

I need to figure out step by step. I would greatly appreciated it!