SEP employer contributions deductible?

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h82goslw
Posts: 196
Joined: Fri Jun 17, 2016 5:44 am

SEP employer contributions deductible?

Post by h82goslw » Sat Aug 01, 2020 12:44 pm

I feel like this is a dumb question and should know this.....If I make employer contributions to my SEP IRA (I am 100% self employed 1099 business) those contributions are still deductible when I do my taxes next year right? (I'll be maxing out my employee contributions of $7K between my Roth and SEP) I know my "employee" SEP contributions are deductible.

DSInvestor
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Joined: Sat Oct 04, 2008 11:42 am

Re: SEP employer contributions deductible?

Post by DSInvestor » Sat Aug 01, 2020 1:04 pm

Employer contributions to SEP-IRA are expenses of the business and are deductible (reduce your AGI and Taxable Income).

SEP-IRA is essentially a traditional IRA with some special features for employers to make contributions. Employee contributions will count as regular Traditional IRA contributions and follow the same rules as Traditional IRA for deduction eligibility. You are covered by an employer plan if the business makes employer contributions to SEP-IRA - Your ability to deduct Traditional IRA contributions will then depend on your MAGI for Traditional IRA purposes. See IRS IRA deduction limits:
https://www.irs.gov/retirement-plans/ir ... ion-limits

If you're single and covered by employer plan, then for 2020 tax year, no Traditional IRA deductions are permitted if your MAGI >75K. Full deduction allowed if MAGI < 65K

If married filing jointly, and covered by employer plan, then for 2020, no Traditional IRA deductions permitted if MAGI > 124K. Full deduction allowed if MAGI < 104K.

The rules for Traditional IRA deduction are tricky.

If self employed, I would recommend Solo 401k over SEP-IRA. Both have similar total contributions but Solo 401k allows for flexibility to make much larger contributions on lower income. For example, if your income would allow 30K of employer contributions to SEP-IRA, then Solo 401k would allow for the same 30K of employer profit share contributions PLUS 19.5K of employee salary deferral contributions.
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Topic Author
h82goslw
Posts: 196
Joined: Fri Jun 17, 2016 5:44 am

Re: SEP employer contributions deductible?

Post by h82goslw » Sat Aug 01, 2020 2:23 pm

Thanks DS.....I've had the SEP for years but only recently have I been trying to max out as much as possible, which is why I was unsure that employer contributions were deductible.

DSInvestor
Posts: 11303
Joined: Sat Oct 04, 2008 11:42 am

Re: SEP employer contributions deductible?

Post by DSInvestor » Sat Aug 01, 2020 2:39 pm

When I had an S-Corp, I had a SEP-IRA and later switched to Solo 401k. For S-Corp, the SEP-IRA employer contribution and Solo 401k employer contributions are expenses of the business and they reduce the net income of the business which flows from the 1120-S corporate return to the individual return 1040 via form K-1.

For sole proprietors who file Schedules C and SE, things work differently. If you look at form 1040 Schedule 1, line 15 is for Self employed SEP, SIMPLE or qualified plans.

Form 1040 Schedule 1: https://www.irs.gov/pub/irs-pdf/f1040s1.pdf
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DSInvestor
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Re: SEP employer contributions deductible?

Post by DSInvestor » Sat Aug 01, 2020 2:50 pm

h82goslw wrote:
Sat Aug 01, 2020 2:23 pm
Thanks DS.....I've had the SEP for years but only recently have I been trying to max out as much as possible, which is why I was unsure that employer contributions were deductible.
If you've made employer SEP-IRA contribution in the past, I would encourage you to review prior year tax return to see where those numbers are entered in the tax return. The tax treatment is the same whether you max out not. If contemplating a big increase in contributions, it would be really good to know the impact of boosting the contribution from 5K to 50K (income permitting). Tax software would be helpful. If you prepared your own tax returns for prior years, you can go back and play around with those older tax returns (saved under a different file name) to increase the contribution and see what happens to the tax forms and the changes in tax liability (fed and state).

In older tax returns, the SEP-IRA contribution would have been in the main 1040 tax form but newer tax returns it appears in 1040 schedule 1.
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