John is self employed architect in a small firm with four employees: himself, hi

Question

John is self employed architect in a small firm with four employees: himself, his office assistant and two drafters all of whom have worked for John full time for the last four years. The office assistant earns 30,000 per year and each drafter earns $40,000. Johns employment taxes are $350,000. John is considering whether to establish a SEP plan and has a few questions:
a) Is he eligible to establish an SEP plan?
b) Is he required to cover his employees under the plan? why or why not?
c) If his employees must be covered, what is the maximum amount that can be contributed on their behalf.
d) If the employees are not convered what is the maximum amount John can contribute for himself?
e) If John, is required to contribute for his employee and chooses to contribute the maximum amount, what is the maximum amount John can contribute for himself? Ignore self employment tax.

Explanation / Answer

a)

Employee eligibility conditions may not be any more strict than (i.e. can be less strict):
1) be at least 21 years of age
2) has worked for the employer for at least three of the previous five years, and
3) received at least $500 in compensation for the tax year

must be eligible for the employer's SEP plan.

b)

The IRS has a system of correction programs for sponsors of retirement plans, including SEPs, which are intended to satisfy Internal Revenue Code requirements but have not met the requirements for a period of time. This system, the Employee Plans Compliance Resolution System (EPCRS), permits employers to correct plan failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis

c)

SEP contributions are treated as part of a profit-sharing plan. For employees, the employer may contribute up to 25% of the employee's wages to the employee's SEP account. For example, if an employee earns $40,000 in wages, the employer could contribute up to $10,000 to the SEP-IRA account

d)

The contribution limit for self-employed persons is more complicated; barring limits, it is 18.587045% (approximately 18.6%) of net profit.

You should not post this many questions in one post so please post remaining in another post

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.