1. What Is SEP?
2. Where to Deduct SEP Contributions

Updates October 1, 2020:

A SEP IRA for S Corp is a type of pension plan that you may be able to set up for your corporation's employee. 

What Is SEP?

There are many types of retirement plans that employers can choose for their employees, including a Simplified Employer Pension (SEP). SEP-IRAs cannot be used by individuals who are not a part of a business. People who are not a part of a business can use either a Roth IRA or a traditional IRA.

If you're a small business owner who wants a solution for contributing to a retirement plan for yourself and your employees that also provides tax benefits, a SEP is a great choice. Employees are not able to contribute to a SEP-IRA. Only employers may contribute to these retirement plans. Also, contributions to a SEP-IRA are not generally considered compensation.

Contributions to a SEP-IRA are not subject to a variety of taxes, including:

  • Social Security taxes
  • Federal income taxes
  • FUTA taxes
  • Medicare taxes

SEPs differ from other retirement plans in that there is no requirement to make a yearly contribution. If you don't have enough money in a given year to make a contribution to your employee's SEP, you can skip this contribution. You should understand, however, that if you make a contribution to one employee's SEP, you must make a contribution for all employees.

A person is self-employed when they are:

  • Part of a general partnership
  • A sole proprietor
  • A member of an LLC where the company has not elected to be treated as a C Corp, LLC, or S Corp

Self-employed individuals are allowed to set up their own SEP plan, after which they can also establish a SEP-IRA. Employees who are eligible for a SEP plan can visit their bank or other financial institution to establish a SEP-IRA of their own. If one of your employees sets up a SEP-IRA, you can make contributions at their financial institution.

If you are making contributions to your personal SEP-IRA, your compensation is your net earnings minus:

Employees must be covered by a SEP if they:

  • Are over the age of 21
  • Have earnings more than $550
  • Have worked for your company for three years in the last five

If you have union employees whose pension is covered by a union agreement, you are not required to provide them a SEP plan.

To set up a SEP plan for yourself or an employee, you will use Form 530-SEP from the IRS. There is a written requirement when setting up a SEP plan, and filling out this form will fulfill this requirement. However, this form does not need to be submitted to the IRS. Instead, you should keep this form in your personal records so that you have proof you've set up a SEP plan.

Once a SEP has been established, you, the employer, will make a deductible contribution directly in your employee's SEP-IRA accounts. Employee contributions are not permitted. 

There can be limits to the amount you can contribute to a SEP-IRA. For instance, in 2014 and 2015, the contribution limits were as follows:

  • $52,000/$53,000
  • No more than a quarter of an employee's annual compensation

You are not permitted to provide make-up contributions. Elective deferrals are also prohibited.

SEP-IRA should never be included in your employee's:

  • Medicare wages
  • Social Security wages
  • Gross wages

However, if excess contributions are made, these may be included in gross wages. 

Where to Deduct SEP Contributions

If you are self-employed and want to deduct your SEP contribution, you can do so on line 28 of your 1040 form. You should refrain from deducting your SEP contributions on your Schedule C or F forms. If you are an LLC member and your company has made an election to be treated for tax purposes as an LLC, S Corp, or C Corp, SEP contributions can be deducted on either Form 1120 or 11205. This means you will be treated the same as any other employee. When an employer contributes to an employee's SEP-IRA account, the contribution can be deducted as a business expense on the appropriate form.

Sole proprietors will use the Schedule C form to deduct contributions. For a partnership, you will use Form 1065 for SEP contribution deductions.

If you need help setting up a SEP-IRA for S Corp, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.