Discussion:SEP IRA and 941 filing question

The monthly earnings are $3975.00 The Before Tax employer SEP-IRA contribution is $400.00 This reduces the Federal Taxable gross to $3575.00

So for filing the 941 for the 4th Quarter I had assumed that the social security taxable wages would be 3975.00 x3 = 11925.00 (line 5a of the 941)

but the taxable income would be $3575 x 3 = 10725.00 (line 2 of the 941).

Is this correct? The SEP-IRA employer contribution should not be counted as Wages, tips, and other compensation on line 2 of the 941 but should be counted in the Taxable social security wages? For some reason I feel like something is wrong in how I am doing this.

So once it is setup correctly the employer contribution of $400.00 a month to the SEP-IRA account would never show up on the wages statement to myself? Is that correct? Then the monthly wages to me would be $3575.00 and the employer contribution would be $400.00 to the SEP-IRA. So would these employer contributions show up anywhere on my W-2?

Last question .... if it had been setup correctly the $400.00 contribution would not be FICA / MED taxable as well? Right now as it is setup the $400.00 SEP-IRA contribution is being taxed for FICA and MEDicare but not federal withholdings.

If the contribution was a SEP, it should be paid directly by the corporation. The amount is not subject to SS and Med withholding and would not appear on your W-2 form at all. Boxes 1, 3, and 5 would be $3,975. The corp would deduct the $400 contribution on the 1120-S form on the Pensions line, as D&T said.

Check-Up for Your SIMPLE IRA, SEP or Similar Plan

How does the IRS view this as I have called it a SEP-IRA even though it has been treated like a SARSEP. I guess on the good side the IRS shouldn't be too upset as they are receiving the additional taxes because it has been administered incorrectly. The downside is these contributions by the corporation have not been treated in the most advantageous way as you have indicated (Pensions line item on 1120-S) and appear to have been treated as straight wages paid to myself as the employee. Thus I have not gotten the full tax advantage.

Two quick additional questions: 1) Can I as the employee be contributing to this SEP-IRA in this fashion?

2) Is it worth the hassle to try and have all of this reclassified correctly. I would assume that would mean correcting all the 941's, the W-2, and the 1120-S filing. Not to mention probably having to contact the SEP-IRA fund to correctly designate the contributions.

Thanks for everyone's insight.

As an employee you may contribute to a Traditional IRA through your SEP plan, designating the contribution as such on the form sent to the fiduciary. You may withhold this contribution from your pay and have your corporation remit it, BUT in no circumstances do you reduce wages on your W-2 BECAUSE you may not be able to deduct this IRA contribution on your 1040 because of income limits and the fact that you are covered by a pension. In that case, you would have to file Form 8606 and treat this as a non-deductible contribution.

This is what has unfortunately happened. There should be no income limits that I can see for these contributions or am I missing something else?

D&T - He has been withholding SS and Med on the $400 SEP contribution each month. He wants to know: (1) if he should amend all of the 941s, (2) if it's legal to have deferred SEP contributions from his wages, and (3) if he needs to contact the SEP-IRA fund to change the designation of the contributions (employer vs employee deferal).

And, to clarify your second paragraph above, are you telling him to change the SEP contributions to Traditional IRA contributions? I have a feeling your 2nd paragraph may have been confusing, since he was asking about SEP contributions.

I think he needs to amend the 941 forms and let the fund know they are employer contributions and not employee deferral contributions. But those with more experience with S-Corps should confirm this.

He should alert the trustee that he was making employer contributions. He should correct his 941, line 2 for each quarter to reflect his gross pay before the SEP. His FICA wages should be fine. The SEP does not reduce FICA; it only means less wages need be taken out of the corporation and thus FICA is saved that way. There would be no additional tax due on these. You do far more payroll than the two accounts I have, Deb. Can he use Form 941c to correct the past quarters in the current quarter? If he actually withheld the money from his pay, he should treat this as a loan on his books and repay himself if possible. The company must fund the SEP itself. There is no hurry to do this, however, if the funds are not there.

I am not advising him to fund an IRA; I am only letting him know he can also contribute to one through his SEP and can do so by withholding from his pay, but it has nothing to do with his wages or the corporate return. He could even do this with the money he withheld from his pay, but I am trying to advise him to look before he leaps into that, for he may find he cannot deduct his IRA contribution.

I think I do need to take a course in clarity in writing.

"The monthly earnings are $3975.00. The before-tax employer SEP-IRA contribution is $400.00. This reduces the Federal taxable gross to $3575.00. So, for filing the 941 for the 4th quarter, I had assumed that the social security taxable wages would be 3975.00 x3 = 11925.00 (line 5a of the 941), but the taxable income would be $3575 x 3 = 10725.00 (line 2 of the 941)."

You're absolutely correct that he would have withholding for SS and Med either way, so, yes, he only needs to correct line 2 on all of the 941s by filing Forms 941c for each quarter. Your idea of using those withdrawals as loans to the corp is very good, and if that's what occurred, I think that would be a fine idea.

I think your writing is topnotch! I think it was my slow brain today and the missing Excedrin from my system (that I should have taken hours ago). By next week, I'll be taking one every morning at 11 am sharp.

So I think the best thing to do is use the 941c to correct all 1Q, 2Q, and 3Q 941's when I send in my 4Q 941 for 2006. I believe I could correct lines 5a and 5c on all the 941's by reducing them by $1200.00 (400 x3) for each quarter. I would in fact potentially get a tax refund. So now the wages would actually by $3575 per month with a $400 a month employer SEP IRA contribution. What I probably did not make clear is the $400.00 SEP-IRA contribution has already been deposited into my SEP-IRA Vanguard account as a direct employer deposit. I don't think I can now get that out so counting it as a loan to be repaid would do no good as that money is deposited already and there is no way for either myself or my company(the employer) to get that back. The biggest error I see is the fact that the $400.00 a month was mistakenly being counted as wages when in reality my wages were only $3575 a month and the $400 SEP-IRA should not have been counted as wages.

Does this make sense? Am I correct is saying that I can just correct the 941's to indicate the taxable wages should only have been $3575 x3 and under this example the lines 2, 5a, and 5c of the 941 would all be same at $3575.00 x3.

Then I will need to be sure that my accountant correctly accounts for the 12 $400.00 payments on the 1120-s and my W-2 and the W-3 which also haven't been submitted could then just indicate that the monthly wages were $3575.00 per month.

How is the IRS going to look upon this blunder??

Let's see...state payroll withholding taxes shouldn't be a problem. Any excess withholding would be refunded when he files his personal state return. The annual reconciliation form (in Michigan, anyway) is not due until 02/28 and should be filed with the correct amount of gross wages. Monthly or quarterly payment vouchers to the State of Michigan show no amount of wages paid until that final reconciliation form at the end of the year.

Unemployment taxes are only paid on the first $9,000 in Michigan and $7,000 for the Fed, but I agree, the quarterly state reports would have to be revised to show the corrected wages. There wouldn't be any change in tax, though.

Well I don't want to take anymore of your time. I have learned a ton today so my hats off to everyone and I apologize again for the meandering towards a concise description of the problem.

Cheers.