Discussion:SEP - General Understanding

Want to minimize those who can participate, so will enable the requirements to having worked 3 out of 5 years and at least 21 years in age. I do not want to go with the elective contributions but simply a one time employer contribution.

First I need to change my salary from $55K to $180K. While foregoing some savings on social security tax, the increase to $180K will allow me to contribute up to $45K for next year and save even more in taxes.

Assuming I payout a year-end bonus by December 31 to get my gross compensation (via payroll/W2) to W2, think I have until I file my 1120S return next year to fund the $45K. I’d like to use next years cash to fund this company contribution.

If I properly extend the 2007 1120S return, I have until September 15, 2008 to fund the company contribution.

So if I fund the contribution on September 1 2008 for $45K – would this bean expense to the S-Corporation for 2007? I am hung up on the whole cash vs. accrual basis situation being a cash basis entity.

If it is a 2007 expense – assume it to be employee benefit expense. I am a 2+% owner (actually 100%) and am concerned this has to be reported somehow through the K-1 like health insurance. However I cannot find anything on this topic.

If my understanding is correct the $45k will not be reported on a W2 (no elective deferral) nor on a K-1. I use next years cash to fund the contribution and have to focus on increasing my payroll and ensuring the other employees do not qualify. While this payment is not taxable to me, I’ll be able to reduce my S-Corp earnings for 2007.

Net, net – moved $45K over to my retirement tax free (until I take future distributions) AND I reduced the reported earnings from my S-Corp by $45K.

It all seems to good to be true – where I am making a mistake?????

To clarify - if I make the contribution in Sept. 2008 - this would be an expense to my corp for 2007 or 2008 (I am a cash basis taxpayer)?

If you plan to fund the 2007 SEP from 2008 earnings, likely you have already paid out all of the available earnings as either wages or S distributions, leaving no AAA at end of year, before accounting for the SEP contribution. The SEP contribution accrual will reduce your AAA at the end of 2007 resulting in a distribution in excess of AAA. This could result in a taxable gain to you, depending upon your basis in the stock.

In terms of total cost to the employer, we've found SIMPLEs to have a greater cost/benefit when employees are involved.