Need Some Deductions for 2011?

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Updated for 2011

SEP Plans

What is a SEP?

A Simplified Employer Pension (SEP) plan is an employer-established retirement plan.

A SEP is ideal for self-employed small business owners who want a simple, tax-favored way to make retirement plan contributions for themselves and their employees (if any).

Setting Up a SEP Plan

IRS Form 5305-SEP can be used to establish a SEP plan. It's a short, simple form to complete.

Using Form 5305-SEP will satisfy the written requirement for establishing a SEP plan.

Do not file Form 5305-SEP with the IRS; keep it for yourself, as evidence that you established a SEP plan.

SEP-IRA Contributions

Employees:

Once the plan is established, you, as the employer, make deductible plan contributions directly into SEP-IRA accounts set up by or for your employees; employees do not make their own contributions.

Form W-2:

You do not report SEP contributions you make on behalf of your employees on their W-2 form.

SEP-IRA contributions are not included in their gross income nor are they subject to income taxes, social security or Medicare taxes.

Self-Employed Persons:

If you're self-employed, you can establish a SEP plan. Once the plan is established, you can set up a SEP-IRA account for yourself.

If you have employees who are eligible to participate in the SEP plan, they can set up their own SEP-IRA accounts at their own financial institution. You make the contributions into the SEP-IRA accounts where their account is located.

You're considered self-employed if you're a sole proprietor or a partnership in a general partnership.

Contribution Limits:

SEP-IRAs permit larger contributions than are allowed for regular IRAs.

For example, for tax year 2011, if you set up your own regular (nonbusiness) traditional IRA and you were under 50 years of age at the end of 2011, the most you could contribute to your IRA is $5,000.

If you were 50 years of age or older at the end of 2011 you could make an additional contribution of up to $1,000, bringing your maximum total annual contribution to $6,000 for 2011.

However, with a SEP-IRA, for 2011, you could contribute up to $49,000 ($50,000 for 2012) yourself and $49,000 for each eligible employee, or 25% of the employee's salary, whichever is lower. The maximum 2011 compensation for each employee that may be considered for this calculation is $245,000.

For retirement plan purposes, a self-employed person is treated as an employee.

No Annual Contribution Required:

Unlike other plans, there is no requirement to make contributions every year. If your short of cash one year, you can simply skip that year.

However, if you have employees, then in years you do make contributions, you must make them for all eligible employees.

Deducting SEP-IRA Contributions

Employees:

SEP-IRA contributions made on behalf of employees are an allowable business deduction and are deducted directly from business income on the appropriate business tax return depending on your business structure.

For example, self-employed persons deduct contributions made for employees on Schedule C, line 19, Pension and profit-sharing plans

Self-employed farmers use Schedule F, C-corporations use Form 1120, S-corporations use Form 1120S, and LLCs and partnerships use Form 1065.

Note: If an LLC elected to be taxed as a C or S Corporation, it would deduct pension contributions for employees on Form 1120 or 1120S.

Self-Employed Persons:

Do not deduct contributions for yourself on Schedule C (or F).

As a sole proprietor, partner, or LLC member, you enter contributions for yourself on Form 1040, line 28. It is subtracted from gross income to arrive at adjusted gross income.

Vesting in a SEP-IRA

Contributions are immediately 100% vested an grow tax free until distributed. The employee owns and controls his/her SEP-IRA.

Distributions from a SEP-IRA cannot be prohibited by the employer.

Reporting Requirements for SEP-Plans

Unlike qualified plans, which have an annual reporting requirement, a SEP does not.

As previously mentioned, you Do not report SEP contributions made for employees on their annual W-2 forms.

Although such contributions are deductible as a business expense, they are not included in the income of employees. Employees will eventually pay the taxes when they receive plan distributions.

Timing Deductions

SEP Plan:

A SEP plan can be established and deductible contributions made for a particular year as late as the due date of your return, plus extensions, for that particular year. For tax year 2011, contributions may be made as late as April 17, 2012. (The deadline for contributions made for tax year 2012 is April 15, 2013.)

For example, to deduct contributions for calendar year 2011, you can establish the plan and make deductible contributions as late as April 17, 2012, plus extensions.

Qualified Plan:

In contrast, a qualified plan must be established no later than the end of the taxable year for which the employer wants deductible contributions to apply.

For example, to get a deduction for 2011 for a qualified plan, you can make contributions as late as April 17, 2012, plus extensions, providing the plan was established no later than December 31, 2011.

SEP Plans: Who Contributes to SEP-IRA Accounts? Can Property be Contributed to a SEP-IRA? Vesting in a SEP-IRA; No Strings Attached to SEP Contributions; Time Limit for SEP Contributions; No Contribution Requirement for SEP-IRAs

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