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Myfreetaxes 2014 Publication 947 - Additional Material Prev  Up  Next   Home   More Online Publications
 

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