SEP-IRA W-2 conflict for self-employed

[texzen5]

OK, a bit of a challenge for you experts.

I'm self-employed. I have been for years. I have not been employed by the company that issued me a one time NQSO distribution via W-2 for several years.  They did withhold FICA though. As I am self-employed (sole proprietor) and there is no reasonable definition of employee that applies to me, I think I should be able to make a SEP-IRA contribution as my own employer using the W-2 income.  It makes little sense to me that the company's mechanism of distribution would define my employment status. 

When I use the Adjusting Self Employment Income mechanism (in the Self-Employed Retirement Section under Income/Expenses) and enter my W-2 amount in the Your Non-Farm Adjusted box my proposed SEP contribution applies perfectly. 

Is this permissible? Or am I sending up a giant audit flag? 

Thanks so much for your insight.  Any alternative solutions would also be appreciated.

[Mike9241]

my conclusion is that it does not qualify.  it is not self-employment income. the plan is your plan. not the plan established by the employer that issued you the w-2. there is a 6% penalty every year for the excess contribution until withdrawn. 

[texzen5]

Thanks for your response. What about a single employee (myself) Solo 401k? Basically, I'm looking for any vehicle possible to make a more substantial retirement contribution (>6000 Regular IRA) to help save on taxes and fund retirement. 

[BillM223]

"They did withhold FICA though" - you mean back when they gave you a W-2? Are they still doing that? I am puzzled what getting a W-2 several year ago has to do with being self-employed.

How are they paying you now? By 1099-NEC? Then the company considers you to be self-employed.

"enter my W-2 amount " - what W-2 amount? I don't understand your current situation. Are you getting a W-2 or not?

Are you filing a Schedule C each year?

Certainly if you are truly self-employed and file a Schedule C, then within limits, you can use the SEP-IRA vehicle. But I guess my assumptions about your status are wrong, because I can't see what the issue is.

[texzen5]

To reiterate:

• I'm truly self-employed. As in, I am not employed by a company. That is my current status. And was in 2020. And the five or six years before. 
• I have not been employed by this particular company in years. I contracted minimally with them (and was 1099'd for those years, including a separate 2020 1099 in addition to the W-2 they issued!) in part to keep shares of private equity alive. 
• In 2020, they issued me a private NQSO (non qualified stock option) payout.  
• This NQSO came via W-2. I have no control over that. It's what they did. 
• They paid FICA. I have no control over that. It's what they did. 
• Neither of the above made me their employee. The proof?  I AM NOT THEIR EMPLOYEE. 
• The bulk of my 2020 earnings came in this NQSO issuance
• I also had other earnings as a contractor. Because I'm self-employed. They are dwarfed by this odd one-time NQSO W-2 issuance. 

I want to use a self-employed retirement vehicle to save money on taxes and fund my retirement because I am self-employed. Which is the most appropriate one to do so? And how should I account for it?

I can see you're struggling with this. I am too. It doesn't fit in a tidy box. That's why I'm asking for guidance and input there. Accept that what I'm telling you is factual. I know what a W-2 vs 1099 is etc.

Thanks. 

[DavidD66]

The compensation you received that was reported on a W-2 cannot be used to determine the amount you can contribute to a SEP or a Solo 401(k).  Only your self-employment income can be used for that.  You cannot report your W-2 income as self-employment income.  In order to be eligible to receive the NQSO, you have to be treated as an employee for the award.  I understand you are not an employee of the company that issued the W-2, but it doesn't matter.  You are receiving employee compensation for work done in prior years.  It doesn't define your status as that of an employee, you're not.  But it does define the nature of the compensation you were paid and limits what you can do with it in terms of contributions to retirement plans.  

[texzen5]

Thanks for the thoughtful answer.