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The Free Tax Return

Free tax return 2. Free tax return   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. Free tax return 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. Free tax return Deferral percentage. Free tax return Employee compensation. Free tax return Compensation of self-employed individuals. Free tax return Choice not to treat deferrals as compensation. Free tax return Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. Free tax return 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. Free tax return S. Free tax return 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. Free tax return Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. Free tax return A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. Free tax return SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). Free tax return 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). Free tax return Eligible employee. Free tax return   An eligible employee is an individual who meets all the following requirements. Free tax return Has reached age 21. Free tax return Has worked for you in at least 3 of the last 5 years. Free tax return Has received at least $550 in compensation from you in 2013. Free tax return This amount remains the same in 2014. Free tax return    You can use less restrictive participation requirements than those listed, but not more restrictive ones. Free tax return Excludable employees. Free tax return   The following employees can be excluded from coverage under a SEP. Free tax return Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Free tax return Nonresident alien employees who have received no U. Free tax return S. Free tax return source wages, salaries, or other personal services compensation from you. Free tax return For more information about nonresident aliens, see Publication 519, U. Free tax return S. Free tax return Tax Guide for Aliens. Free tax return Setting Up a SEP There are three basic steps in setting up a SEP. Free tax return You must execute a formal written agreement to provide benefits to all eligible employees. Free tax return You must give each eligible employee certain information about the SEP. Free tax return A SEP-IRA must be set up by or for each eligible employee. Free tax return Many financial institutions will help you set up a SEP. Free tax return Formal written agreement. Free tax return   You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. Free tax return You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. Free tax return However, see When not to use Form 5305-SEP, below. Free tax return   If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Free tax return Keep the original form. Free tax return Do not file it with the IRS. Free tax return Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. Free tax return See the Form 5305-SEP instructions for details. Free tax return If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. Free tax return When not to use Form 5305-SEP. Free tax return   You cannot use Form 5305-SEP if any of the following apply. Free tax return You currently maintain any other qualified retirement plan other than another SEP. Free tax return You have any eligible employees for whom IRAs have not been set up. Free tax return You use the services of leased employees, who are not your common-law employees (as described in chapter 1). Free tax return 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. Free tax return An affiliated service group described in section 414(m). Free tax return A controlled group of corporations described in section 414(b). Free tax return Trades or businesses under common control described in section 414(c). Free tax return You do not pay the cost of the SEP contributions. Free tax return Information you must give to employees. Free tax return   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. Free tax return An IRS model SEP is not considered adopted until you give each employee this information. Free tax return Setting up the employee's SEP-IRA. Free tax return   A SEP-IRA must be set up by or for each eligible employee. Free tax return SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. Free tax return You send SEP contributions to the financial institution where the SEP-IRA is maintained. Free tax return Deadline for setting up a SEP. Free tax return   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. Free tax return Credit for startup costs. Free tax return   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. Free tax return For more information, see Credit for startup costs under Reminders, earlier. Free tax return 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. Free tax return If you are self-employed, you can contribute to your own SEP-IRA. Free tax return Contributions must be in the form of money (cash, check, or money order). Free tax return You cannot contribute property. Free tax return However, participants may be able to transfer or roll over certain property from one retirement plan to another. Free tax return See Publication 590 for more information about rollovers. Free tax return You do not have to make contributions every year. Free tax return 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). Free tax return 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. Free tax return Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. Free tax return A SEP-IRA cannot be a Roth IRA. Free tax return Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Free tax return Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. Free tax return If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. Free tax return Participants age 70½ or over must take required minimum distributions. Free tax return Time limit for making contributions. Free tax return   To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. Free tax return 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. Free tax return Compensation generally does not include your contributions to the SEP. Free tax return The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. Free tax return Example. Free tax return Your employee, Mary Plant, earned $21,000 for 2013. Free tax return The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). Free tax return Contributions for yourself. Free tax return   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. Free tax return However, special rules apply when figuring your maximum deductible contribution. Free tax return See Deduction Limit for Self-Employed Individuals , later. Free tax return Annual compensation limit. Free tax return   You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. Free tax return However, $51,000 is the maximum contribution for an eligible employee. Free tax return These limits are $260,000 and $52,000, respectively, in 2014. Free tax return Example. Free tax return Your employee, Susan Green, earned $210,000 for 2013. Free tax return Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. Free tax return More than one plan. Free tax return   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. Free tax return When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Free tax return 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. Free tax return Tax treatment of excess contributions. Free tax return   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. Free tax return 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). Free tax return $51,000. Free tax return 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. Free tax return For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. Free tax return Reporting on Form W-2. Free tax return   Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). Free tax return Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. Free tax return If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. Free tax return 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. Free tax return Your contributions (including any excess contributions carryover). Free tax return 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. Free tax return In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. Free tax return 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. Free tax return 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. Free tax return The deduction for the deductible part of your self-employment tax. Free tax return The deduction for contributions to your own SEP-IRA. Free tax return The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. Free tax return 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. Free tax return 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. Free tax return Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Free tax return 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. Free tax return However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. Free tax return 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. Free tax return Excise tax. Free tax return   If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. Free tax return For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. Free tax return When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. Free tax return 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. Free tax return 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. Free tax return Example. Free tax return You are a fiscal year taxpayer whose tax year ends June 30. Free tax return You maintain a SEP on a calendar year basis. Free tax return You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. Free tax return Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Free tax return 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. Free tax return S. Free tax return Return of Partnership Income; and corporations deduct them on Form 1120, U. Free tax return S. Free tax return Corporation Income Tax Return, or Form 1120S, U. Free tax return S. Free tax return Income Tax Return for an S Corporation. Free tax return Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Free tax return (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. Free tax return , you receive from the partnership. Free tax return ) 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. Free tax return Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. Free tax return (See the Caution, next. Free tax return ) 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. Free tax return 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. Free tax return You are not allowed to set up a SARSEP after 1996. Free tax return 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. Free tax return If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. Free tax return 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. Free tax return At least 50% of your employees eligible to participate choose to make elective deferrals. Free tax return You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. Free tax return The elective deferrals of your highly compensated employees meet the SARSEP ADP test. Free tax return SARSEP ADP test. Free tax return   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. Free tax return A highly compensated employee is defined in chapter 1. Free tax return Deferral percentage. Free tax return   The deferral percentage for an employee for a year is figured as follows. Free tax return   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. Free tax return Employee compensation. Free tax return   For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Free tax return Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. Free tax return See Compensation in chapter 1. Free tax return 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. Free tax return Compensation of self-employed individuals. Free tax return   If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. Free tax return   Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. Free tax return Choice not to treat deferrals as compensation. Free tax return   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. Free tax return Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. Free tax return 25% of the participant's compensation (limited to $255,000 of the participant's compensation). Free tax return $17,500. Free tax return The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. Free tax return Cash or deferred arrangement (section 401(k) plan). Free tax return Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). Free tax return SIMPLE IRA plan. Free tax return In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. Free tax return Catch-up contributions. Free tax return   A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Free tax return The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. Free tax return 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). Free tax return However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Free tax return The catch-up contribution limit. Free tax return The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Free tax return   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). Free tax return Overall limit on SEP contributions. Free tax return   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). Free tax return The same rule applies to contributions you make to your own SEP-IRA. Free tax return See Contribution Limits , earlier. Free tax return Figuring the elective deferral. Free tax return   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. Free tax return 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. Free tax return However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Free tax return Excess deferrals. Free tax return   For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. Free tax return For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. Free tax return The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. Free tax return See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. Free tax return Excess SEP contributions. Free tax return   Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. Free tax return You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. Free tax return If you do not notify them within this time period, you must pay a 10% tax on the excess. Free tax return For an explanation of the notification requirements, see Rev. Free tax return Proc. Free tax return 91-44, 1991-2 C. Free tax return B. Free tax return 733. Free tax return If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. Free tax return Reporting on Form W-2. Free tax return   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Free tax return You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Free tax return You must also include them in box 12. Free tax return Mark the “Retirement plan” checkbox in box 13. Free tax return For more information, see the Form W-2 instructions. Free tax return Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. Free tax return 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. Free tax return Distributions are subject to IRA rules. Free tax return 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. Free tax return For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. Free tax return 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. Free tax return Making excess contributions. Free tax return Making early withdrawals. Free tax return Not making required withdrawals. Free tax return For information about these taxes, see chapter 1 in Publication 590. Free tax return Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. Free tax return Prohibited transaction. Free tax return   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. Free tax return In that case, the SEP-IRA will no longer qualify as an IRA. Free tax return For a list of prohibited transactions, see Prohibited Transactions in chapter 4. Free tax return Effects on employee. Free tax return   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. Free tax return 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. Free tax return Also, the employee may have to pay the additional tax for making early withdrawals. Free tax return 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. Free tax return See Setting Up a SEP , earlier. Free tax return Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. Free tax return You must also give them notice of any excess contributions. Free tax return 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). Free tax return 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. Free tax return For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. Free tax return Prev  Up  Next   Home   More Online Publications