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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28082
Experience:  Taxes, Immigration, Labor Relations
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Our c corp is shifting to an s corp. we have 3 officers that

Customer Question

hello there - our c corp is shifting to an s corp. we have 3 officers that get salaries. 6 shareholders. Is it more advantageous for the S corp to set up the SEP or can the officers just contribute to their own individual SEPs. Can up to 25% of the distributions for the other owners go into SEPs as well. What's deductible to the corporation.
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

Employees may not contribute into their own SEP plans based on wages paid by the employer.
Only self-employed individuals may contribute into their own SEP plans.
In all other situations SEP contributions are made by employers only.

Expert:  Lev replied 1 year ago.

For instance you may establish SEP plan under S-corporation - and S-corporation will do contributions for all employees.
The maximum amount will be based on wages.
For example - if employee's wages will be $100k - S-corporation may contribute $25k into SEP (25% maximum) - and that amount will not be taxable in the current year, but will be deductible for S-corporation.

Only wages are qualified compensation fro SEP contribution purposes. Amounts distributed on K1 are not counted.
That percentage must be the same for all eligible employees and may not be limited for shareholders only.

The contributions S-corporation makes to each employee’s SEP-IRA each year cannot exceed the lesser of:

--25% of compensation, or

--$53,000 (for 2015 and 2016

Any questions?

Customer: replied 1 year ago.
OK. What about distributions after the salaries both to the salaried officers and other owners. Does the s corp do that for them or each individual should do that on their own. In your previous answer can the S corp make the contribution to the salaried officer to have the paper trail to already established SEP-IRAs set up by the individuals or does it have to be a designated SEP-IRA set up by the s corp under that name.
Expert:  Lev replied 1 year ago.

When S-corporation make contributions for employees - that must be the SEP established by S-corporation.
ONLY self-employed individuals may establish and contribute into their own SEP plans.

Customer: replied 1 year ago.
ok didn't see answer to last piece and we will be done. With the distributions to the shareholders that are not employees of the S corp. Can they do contributions to a SEP on their own or does that have to be done by the s corp?
Expert:  Lev replied 1 year ago.

With the distributions to the shareholders that are not employees of the S corp.
ONLY earned income is treated as compensation for SEP contribution purposes.
While there might be different definitions of compensation - generally ONLY wages paid by S-corporation and reported on W2 are treated as compensation.
Distributions reported on K1 are NOT classified as compensation.
For exact definition of compensation - we need to look into SEP documents (ByLaws) as every plan is different..
Can they do contributions to a SEP on their own or does that have to be done by the s corp?

Contributions to SEP are make by employers ONLY. So only S-corporation makes SEP contributions and such contributions must be the same for all eligible employees. When S-corporation makes SEP contributions - that must be SEP established by S-corporation.
Employees do not make SEP contributions. ONLY self-employed individuals may establish and contribute into their own SEP plans.

Expert:  Lev replied 1 year ago.

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