SEP - Wife employee of Owner Husband - pt business

[BulldogTom]

TP has a small schedule C business.  He wants to adopt a SEP that contributes 25% of salary per year for his spouse (the only employee).  Increasing wife compensation via the SEP contribution will definitely produce a loss in the business.

 

I know the basics about SEPs, but I don't know if a spouse employee is eligible.  If the business throws a loss, can he still contribute to a SEP for the spouse, or is she considered an owner as well for the purposes of the SEP and limited by the amount of income.

 

Thanks

 

Tom

Newark, CA

[Jack from Ohio]

No profit, no SEP contribution.

[Gail in Virginia]

I am not 100% sure about the SEP, but would a SIMPLE allow for the same kind of tax benefit?  Increase wife's salary, have her defer it in the SIMPLE, and make an employer match.  I don't think there is any requirement to have a profit to make a contribution to a SIMPLE.  Of course, there would still be SS and Medicare tax on the portion that is salary deferral, but not on the match. 

[Richcpaman]

Why wouldn't he be able to contribute 25% to a SEP for an employee?  He would get no benefit because he has no Sch C net profit so no SEP for him.  But as an employer, he can contribute to a SEP for his employee's.

 

I do not know of an exception for a spouse employee.  However, the spouse has to provide Bona fide services. 

 

Rich

[jklcpa]

Why wouldn't he be able to contribute 25% to a SEP for an employee?  He would get no benefit because he has no Sch C net profit so no SEP for him.  But as an employer, he can contribute to a SEP for his employee's.

 

I do not know of an exception for a spouse employee.  However, the spouse has to provide Bona fide services. 

 

Rich

 

 

I could be wrong here, but with a SEP the % contribution to the SEP can't discriminate and must be the same for all employees including him, so if the business has a loss, he can't contribute to the SEP for this year for anyone.

 

A SIMPLE would eliminate this problem and the wife could elect to contribute any percentage of her salary up to 100% of it, and is not affected by the company's profit or loss situation. Wife could also get the employer match.  However, this isn't available to this taxpayer for the 2014 year because SIMPLEs must be set up no later than 10/1 for that tax year, and technically the employee portion of the contributions must be made no later than 30 days after the end of the month the deferral was made. The employer match can be paid later, I believe up until the due date of the return.

[BulldogTom]

But a SIMPLE match is limited to 3% of the employee income.  So if the Spouse is earning 12K per year, the match is limited to $360.  And the deferral is subject to FICA.  In a SEP, the match would be 3K.  Say the owner bumped the income to 15K per year, the match would go to $450, but the additional FICA on the extra 3k of income would go to $230 for the extra $90 of match.

 

That is why the SEP, if possible, would be a better choice.

 

However, in reading about the SEP, it is a profit sharing plan, so the idea that there must be profits to share makes sense.

 

Tom

Newark, CA

[jklcpa]

Yes Tom, I realize that, I was only answering about the SIMPLE because someone else mentioned it and it isn't even possible to have that for 2014 anyway.

SEP is the better choice for your client, as long as the company has a profit that allows for the contribution.

 

i do have 2 clients where the simple is the better choice because the owners don't want to cover all of their employees. One of them didn't believe me that the simple would be better than a 401K in their case. This one client chose the 401K that first year because they thought that they'd be able to contribute the higher limits only to be told that their contribution for the highly compensated owners was severely limited because the plan was top-heavy.  The 2nd year went with the simple.

[Gail in Virginia]

I mentioned the Simple - was not thinking about when it had to be set up.  At this point, maybe IRA contributions?  For him and her?  it won't save on SE tax, but would help with income tax, provided they are not covered elsewhere and otherwise meet the income requirements.