Understanding employment status for SEP-IRA contributions

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
charles_shaw
Posts: 16
Joined: Mon Sep 19, 2011 1:57 pm

Understanding employment status for SEP-IRA contributions

Post by charles_shaw » Mon Apr 23, 2012 11:43 am

Hi all,

I'm trying to understand what my options are for retirement accounts.

I'm a 25 year old web-developer. Last year I quit my full-time job to pursue various freelance opportunities. Currently I work about 30 hours/week for a single company as a contractor -- I'm paid hourly, not salary, get no benefits, but I get a W-2 and the company withholds taxes from my pay check.
I still occasionally do small freelance jobs for various other clients, but the overwhelming majority of my income now comes from this single source.

My question is do I count as an employee of the company for whom I am a W-2 contractor? Or am I technically self-employed? And, in my current situation, am I eligible to contribute to a SEP-IRA or similar self-employed type retirement account?

If my situation changes and I am hired on as a full-time employee at some company, but still do occasional freelance on the side, would I still be eligible to contribute to a SEP-IRA?

Thanks all for any insight.

mschmitt
Posts: 74
Joined: Mon Aug 13, 2007 7:16 pm

Re: Understanding employment status for SEP-IRA contribution

Post by mschmitt » Mon Apr 23, 2012 12:12 pm

I'm no expert, but here's my take:

Classifying someone as employee vs. self-employed contractor is uhhh... fuzzy. Here is what the IRS says: http://www.irs.gov/businesses/small/art ... 21,00.html

The general rule is if you are paid on a W2 you are an employee. If it's a 1099 you are an independent contractor. I have no idea if you can claim to be self-employed if you get a W2 but I highly doubt it, and I think it would send up a bunch of red flags to the IRS. The problem I see here is this is after the fact. The company has already decided you are an employee, withheld taxes and issued a W2.

If you think you fit the (very vague) description of an independent contractor according to the IRS guidelines, then ask the company to pay you on a 1099.

charles_shaw
Posts: 16
Joined: Mon Sep 19, 2011 1:57 pm

Re: Understanding employment status for SEP-IRA contribution

Post by charles_shaw » Mon Apr 23, 2012 1:35 pm

Thanks for the link. The excerpt below makes me feel like I am an employee and not an independent contractor (from this page http://www.irs.gov/businesses/small/art ... 15,00.html)
You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.

If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your earnings are generally not subject to Self-Employment Tax.

However, your earnings as an employee may be subject to FICA (Social Security tax and Medicare) and income tax withholding.
Since I am employee but still do freelance on the side, am I precluded from any SEP-IRA contributions (perhaps from just the portion of earnings that I earned as a self-employed entity?)

Also, if I am technically an employee in the eyes of the IRS, should I be able to contribute to my company's 401k, or can the company disallow me from that since I'm like a fake-real-employee? I'm confused about this grey area where I'm an "employee" but have none of the benefits that 'real' full-time employees receive.

User avatar
Duckie
Posts: 6002
Joined: Thu Mar 08, 2007 2:55 pm

Re: Understanding employment status for SEP-IRA contribution

Post by Duckie » Mon Apr 23, 2012 3:24 pm

charles_shaw wrote:Since I am employee but still do freelance on the side, am I precluded from any SEP-IRA contributions (perhaps from just the portion of earnings that I earned as a self-employed entity?)
You are allowed to make $5K Traditional IRA or Roth IRA contributions as an employee. You are allowed to make SEP IRA or SIMPLE IRA contributions for your free-lance work.
Also, if I am technically an employee in the eyes of the IRS, should I be able to contribute to my company's 401k, or can the company disallow me from that since I'm like a fake-real-employee? I'm confused about this grey area where I'm an "employee" but have none of the benefits that 'real' full-time employees receive.
This depends on the rules of your company. You are a part-time contract employee without benefits, so they probably are allowed to exclude you from the benefit of the 401k. Check with Human Resources.

Post Reply