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The Beware Amending Tax Returns

Beware amending tax returns 2. Beware amending tax returns   Simplified Employee Pensions (SEPs) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Setting Up a SEPWhen not to use Form 5305-SEP. Beware amending tax returns How Much Can I Contribute?Contribution Limits Deducting ContributionsDeduction Limit for Contributions for Participants Deduction Limit for Self-Employed Individuals Carryover of Excess SEP Contributions When To Deduct Contributions Where To Deduct Contributions Salary Reduction Simplified Employee Pensions (SARSEPs)SARSEP ADP test. Beware amending tax returns Deferral percentage. Beware amending tax returns Employee compensation. Beware amending tax returns Compensation of self-employed individuals. Beware amending tax returns Choice not to treat deferrals as compensation. Beware amending tax returns Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. Beware amending tax returns Reporting and Disclosure Requirements Topics - This chapter discusses: Setting up a SEP How much can I contribute Deducting contributions Salary reduction simplified employee pensions (SARSEPs) Distributions (withdrawals) Additional taxes Reporting and disclosure requirements Useful Items - You may want to see: Publication 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4285 SEP Checklist 4286 SARSEP Checklist 4333 SEP Retirement Plans for Small Businesses 4336 SARSEP for Small Businesses 4407 SARSEP—Key Issues and Assistance Forms (and Instructions) W-2 Wage and Tax Statement 1040 U. Beware amending tax returns S. Beware amending tax returns Individual Income Tax Return 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan. Beware amending tax returns Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. Beware amending tax returns A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. Beware amending tax returns SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). Beware amending tax returns A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later). Beware amending tax returns Eligible employee. Beware amending tax returns   An eligible employee is an individual who meets all the following requirements. Beware amending tax returns Has reached age 21. Beware amending tax returns Has worked for you in at least 3 of the last 5 years. Beware amending tax returns Has received at least $550 in compensation from you in 2013. Beware amending tax returns This amount remains the same in 2014. Beware amending tax returns    You can use less restrictive participation requirements than those listed, but not more restrictive ones. Beware amending tax returns Excludable employees. Beware amending tax returns   The following employees can be excluded from coverage under a SEP. Beware amending tax returns Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Beware amending tax returns Nonresident alien employees who have received no U. Beware amending tax returns S. Beware amending tax returns source wages, salaries, or other personal services compensation from you. Beware amending tax returns For more information about nonresident aliens, see Publication 519, U. Beware amending tax returns S. Beware amending tax returns Tax Guide for Aliens. Beware amending tax returns Setting Up a SEP There are three basic steps in setting up a SEP. Beware amending tax returns You must execute a formal written agreement to provide benefits to all eligible employees. Beware amending tax returns You must give each eligible employee certain information about the SEP. Beware amending tax returns A SEP-IRA must be set up by or for each eligible employee. Beware amending tax returns Many financial institutions will help you set up a SEP. Beware amending tax returns Formal written agreement. Beware amending tax returns   You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. Beware amending tax returns You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. Beware amending tax returns However, see When not to use Form 5305-SEP, below. Beware amending tax returns   If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Beware amending tax returns Keep the original form. Beware amending tax returns Do not file it with the IRS. Beware amending tax returns Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. Beware amending tax returns See the Form 5305-SEP instructions for details. Beware amending tax returns If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. Beware amending tax returns When not to use Form 5305-SEP. Beware amending tax returns   You cannot use Form 5305-SEP if any of the following apply. Beware amending tax returns You currently maintain any other qualified retirement plan other than another SEP. Beware amending tax returns You have any eligible employees for whom IRAs have not been set up. Beware amending tax returns You use the services of leased employees, who are not your common-law employees (as described in chapter 1). Beware amending tax returns You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP. Beware amending tax returns An affiliated service group described in section 414(m). Beware amending tax returns A controlled group of corporations described in section 414(b). Beware amending tax returns Trades or businesses under common control described in section 414(c). Beware amending tax returns You do not pay the cost of the SEP contributions. Beware amending tax returns Information you must give to employees. Beware amending tax returns   You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. Beware amending tax returns An IRS model SEP is not considered adopted until you give each employee this information. Beware amending tax returns Setting up the employee's SEP-IRA. Beware amending tax returns   A SEP-IRA must be set up by or for each eligible employee. Beware amending tax returns SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. Beware amending tax returns You send SEP contributions to the financial institution where the SEP-IRA is maintained. Beware amending tax returns Deadline for setting up a SEP. Beware amending tax returns   You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year. Beware amending tax returns Credit for startup costs. Beware amending tax returns   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2013. Beware amending tax returns For more information, see Credit for startup costs under Reminders, earlier. Beware amending tax returns How Much Can I Contribute? The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. Beware amending tax returns If you are self-employed, you can contribute to your own SEP-IRA. Beware amending tax returns Contributions must be in the form of money (cash, check, or money order). Beware amending tax returns You cannot contribute property. Beware amending tax returns However, participants may be able to transfer or roll over certain property from one retirement plan to another. Beware amending tax returns See Publication 590 for more information about rollovers. Beware amending tax returns You do not have to make contributions every year. Beware amending tax returns But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). Beware amending tax returns When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. Beware amending tax returns Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. Beware amending tax returns A SEP-IRA cannot be a Roth IRA. Beware amending tax returns Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Beware amending tax returns Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. Beware amending tax returns If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. Beware amending tax returns Participants age 70½ or over must take required minimum distributions. Beware amending tax returns Time limit for making contributions. Beware amending tax returns   To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. Beware amending tax returns Contribution Limits Contributions you make for 2013 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000. Beware amending tax returns Compensation generally does not include your contributions to the SEP. Beware amending tax returns The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. Beware amending tax returns Example. Beware amending tax returns Your employee, Mary Plant, earned $21,000 for 2013. Beware amending tax returns The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). Beware amending tax returns Contributions for yourself. Beware amending tax returns   The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. Beware amending tax returns However, special rules apply when figuring your maximum deductible contribution. Beware amending tax returns See Deduction Limit for Self-Employed Individuals , later. Beware amending tax returns Annual compensation limit. Beware amending tax returns   You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. Beware amending tax returns However, $51,000 is the maximum contribution for an eligible employee. Beware amending tax returns These limits are $260,000 and $52,000, respectively, in 2014. Beware amending tax returns Example. Beware amending tax returns Your employee, Susan Green, earned $210,000 for 2013. Beware amending tax returns Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. Beware amending tax returns More than one plan. Beware amending tax returns   If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $51,000 or 100% of the participant's compensation. Beware amending tax returns When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Beware amending tax returns Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain. Beware amending tax returns Tax treatment of excess contributions. Beware amending tax returns   Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2013 that exceed the lesser of the following amounts. Beware amending tax returns 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). Beware amending tax returns $51,000. Beware amending tax returns Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. Beware amending tax returns For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. Beware amending tax returns Reporting on Form W-2. Beware amending tax returns   Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). Beware amending tax returns Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. Beware amending tax returns If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. Beware amending tax returns Deduction Limit for Contributions for Participants The most you can deduct for your contributions to you or your employee's SEP-IRA is the lesser of the following amounts. Beware amending tax returns Your contributions (including any excess contributions carryover). Beware amending tax returns 25% of the compensation (limited to $255,000 per participant) paid to the participants during 2013 from the business that has the plan, not to exceed $51,000 per participant. Beware amending tax returns In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. Beware amending tax returns Deduction Limit for Self-Employed Individuals If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. Beware amending tax returns When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. Beware amending tax returns The deduction for the deductible part of your self-employment tax. Beware amending tax returns The deduction for contributions to your own SEP-IRA. Beware amending tax returns The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. Beware amending tax returns For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. Beware amending tax returns To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. Beware amending tax returns Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Beware amending tax returns Carryover of Excess SEP Contributions If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. Beware amending tax returns However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. Beware amending tax returns If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. Beware amending tax returns Excise tax. Beware amending tax returns   If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. Beware amending tax returns For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. Beware amending tax returns When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. Beware amending tax returns If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. Beware amending tax returns If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year. Beware amending tax returns Example. Beware amending tax returns You are a fiscal year taxpayer whose tax year ends June 30. Beware amending tax returns You maintain a SEP on a calendar year basis. Beware amending tax returns You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. Beware amending tax returns Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Beware amending tax returns For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U. Beware amending tax returns S. Beware amending tax returns Return of Partnership Income; and corporations deduct them on Form 1120, U. Beware amending tax returns S. Beware amending tax returns Corporation Income Tax Return, or Form 1120S, U. Beware amending tax returns S. Beware amending tax returns Income Tax Return for an S Corporation. Beware amending tax returns Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Beware amending tax returns (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Beware amending tax returns , you receive from the partnership. Beware amending tax returns ) Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees. Beware amending tax returns Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. Beware amending tax returns (See the Caution, next. Beware amending tax returns ) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. Beware amending tax returns This contribution is called an “elective deferral” because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them. Beware amending tax returns You are not allowed to set up a SARSEP after 1996. Beware amending tax returns However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. Beware amending tax returns If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. Beware amending tax returns Who can have a SARSEP?   A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met. Beware amending tax returns At least 50% of your employees eligible to participate choose to make elective deferrals. Beware amending tax returns You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. Beware amending tax returns The elective deferrals of your highly compensated employees meet the SARSEP ADP test. Beware amending tax returns SARSEP ADP test. Beware amending tax returns   Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. Beware amending tax returns A highly compensated employee is defined in chapter 1. Beware amending tax returns Deferral percentage. Beware amending tax returns   The deferral percentage for an employee for a year is figured as follows. Beware amending tax returns   The elective employer contributions (excluding certain catch-up contributions)  paid to the SEP for the employee for the year     The employee's compensation (limited to $255,000 in 2013)   The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the SARSEP ADP test. Beware amending tax returns Employee compensation. Beware amending tax returns   For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Beware amending tax returns Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. Beware amending tax returns See Compensation in chapter 1. Beware amending tax returns Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax purposes. Beware amending tax returns Compensation of self-employed individuals. Beware amending tax returns   If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. Beware amending tax returns   Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. Beware amending tax returns Choice not to treat deferrals as compensation. Beware amending tax returns   You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP. Beware amending tax returns Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. Beware amending tax returns 25% of the participant's compensation (limited to $255,000 of the participant's compensation). Beware amending tax returns $17,500. Beware amending tax returns The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. Beware amending tax returns Cash or deferred arrangement (section 401(k) plan). Beware amending tax returns Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). Beware amending tax returns SIMPLE IRA plan. Beware amending tax returns In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. Beware amending tax returns Catch-up contributions. Beware amending tax returns   A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Beware amending tax returns The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. Beware amending tax returns Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the elective deferral limit (the lesser of 25% of compensation or $17,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). Beware amending tax returns However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Beware amending tax returns The catch-up contribution limit. Beware amending tax returns The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Beware amending tax returns   Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $17,500 in 2013 and in 2014). Beware amending tax returns Overall limit on SEP contributions. Beware amending tax returns   If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000 for 2013 ($52,000 for 2014). Beware amending tax returns The same rule applies to contributions you make to your own SEP-IRA. Beware amending tax returns See Contribution Limits , earlier. Beware amending tax returns Figuring the elective deferral. Beware amending tax returns   For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans. Beware amending tax returns Tax Treatment of Deferrals Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. Beware amending tax returns However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Beware amending tax returns Excess deferrals. Beware amending tax returns   For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. Beware amending tax returns For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. Beware amending tax returns The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. Beware amending tax returns See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. Beware amending tax returns Excess SEP contributions. Beware amending tax returns   Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. Beware amending tax returns You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. Beware amending tax returns If you do not notify them within this time period, you must pay a 10% tax on the excess. Beware amending tax returns For an explanation of the notification requirements, see Rev. Beware amending tax returns Proc. Beware amending tax returns 91-44, 1991-2 C. Beware amending tax returns B. Beware amending tax returns 733. Beware amending tax returns If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. Beware amending tax returns Reporting on Form W-2. Beware amending tax returns   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Beware amending tax returns You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Beware amending tax returns You must also include them in box 12. Beware amending tax returns Mark the “Retirement plan” checkbox in box 13. Beware amending tax returns For more information, see the Form W-2 instructions. Beware amending tax returns Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. Beware amending tax returns Also, you cannot make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts. Beware amending tax returns Distributions are subject to IRA rules. Beware amending tax returns Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. Beware amending tax returns For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. Beware amending tax returns Additional Taxes The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions. Beware amending tax returns Making excess contributions. Beware amending tax returns Making early withdrawals. Beware amending tax returns Not making required withdrawals. Beware amending tax returns For information about these taxes, see chapter 1 in Publication 590. Beware amending tax returns Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. Beware amending tax returns Prohibited transaction. Beware amending tax returns   If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. Beware amending tax returns In that case, the SEP-IRA will no longer qualify as an IRA. Beware amending tax returns For a list of prohibited transactions, see Prohibited Transactions in chapter 4. Beware amending tax returns Effects on employee. Beware amending tax returns   If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. Beware amending tax returns The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. Beware amending tax returns Also, the employee may have to pay the additional tax for making early withdrawals. Beware amending tax returns Reporting and Disclosure Requirements If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. Beware amending tax returns See Setting Up a SEP , earlier. Beware amending tax returns Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. Beware amending tax returns You must also give them notice of any excess contributions. Beware amending tax returns For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP). Beware amending tax returns Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. Beware amending tax returns For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. Beware amending tax returns Prev  Up  Next   Home   More Online Publications