Discussion:SEP IRA Contribution amount for Sch. C
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Discussion Forum Index --> Tax Questions --> SEP IRA Contribution amount for Sch. C
| 22 February 2006 | |
| For Sch. C, I understand that the owner can contribute to his own SEP IRA up to 25% of Net Profit minus 1/2 SE tax. Correct? However, is the amount allowed to deduct on first page of 1040 Line 28 limited to 20% instead of 25% maximum amount allowed to contribute? Thanks in advance for your input. | |
| 22 February 2006 | |
| Refer to publication 560 - If the plan rate is 25% then the rate will be 20% for the owner and 25% for employees. Self employed are also required to reduce their net income by 1/2 of their self employment tax. | |
| 23 February 2006 | |
| The calculation for a self-employed person is 25% of compensation. Compensation is the Schedule C net minus the plan contribution for the owner minus one-half of the SE tax. | |
| 23 February 2006 | |
| I understand the calculation for the maximum contribution allowed, but still don't understand that only 20% can be deducted on Line 28 of 1040, rather than 25% that was actually contributed. This is for the self-employed. | |
| 23 February 2006 | |
| Bean, this is a case where 20% is actually 25%.
For example, if the adjusted Schedule C net is $100,000 (after subtracting one-half of the SE tax), then the maximum SEP contribution is equal to 25% of the adjusted Schedule C net after subtracting out the SEP contribution. In other words the maximum plan contribution would be 25% x (100,000 - $20,000) = $20,000. A short cut way of saying the same thing would be to say that the maximum plan contribution is 20% of the adjusted Schedule C net (even though we all know that the contribution rate is really 25%). Therefore, if the owner maxes out at 25%, he must also contribute the same percentage for all eligible employees. In my example, the contribution is 25% and that is also the amount deducted on the 1040 -- $20,000. | |
| 23 February 2006 | |
| Riley2, I think it is starting to make a little sense - I think. I had to read your example a few times to understand. So the bottom line is: Amount contribute should always EQUAL to amount deducted on Line 28 of 1040?! Please confirm that asap if you can. THanks so much for your help. | |
| 12 November 2006 | |
| do we need to reduce the net income on C by the employer contribution for the employees before applying the 20% for the owner? | |
| 12 November 2006 | |
| Net profit from Sch C minus one half of self employment tax. | |
Death&Taxes (talk|edits) said: | 12 November 2006 |
| In answer to Racer, I would think you must reduce the Schedule C profit by the contribution for the other participants. As Solomon notes, it is Net Profit from Schedule C, not Net Profit before calcualtion of pension. | |
Www.cpa1.biz (talk|edits) said: | 19 December 2006 |
| I have a question on this.
I see that the employer gets to contribute 20% of the net (minus 1/2 SE) for him/herself. Now, the same 20% should be of what of the employee. The amount on on line 1 of their W-2? Also, when does this payment need to be made for the employee? Please advise. Thanks, Bj | |
Death&Taxes (talk|edits) said: | 19 December 2006 |
| Don't be so sure of the 20% Discussion: SEP contributions for employees | |
| 20 December 2006 | |
| WWW.CPA.biz, the 20% of net is actually 25% of the owner's "compensation", making the contribution for the employee 25%. | |
Www.cpa1.biz (talk|edits) said: | 20 December 2006 |
| Thanks Riley.......I now understand.
take care you all.. BJ | |
| 30 September 2007 | |
| My client contributed $21,500 to the SEP IRA and the max is only $19,369. The plan admin indicated if I report only the $19,369 on the 2006 TR then I can report the excess on the 2007 TR. Thus will not have to withdraw by 10/15/07. Does this should reasonable? | |
| September 30, 2007 | |
| Only if it was paid in 07. Assuming that, then, yes, it makes perfect sense. | |
