Question

SEP Contribution for S Corp Owner

Forum|Forum|4 years ago
March 5, 2022
1 reply
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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).

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D

deanna-tomasettiAuthor

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:

25% of compensation, or
$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.

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