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Can you pay yourself in just SEP-IRA money and avoid Social Security taxes?

 
 
raylopez99
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      09-13-2006, 07:06 AM
Facts: sole proprietor with a SEP-IRA. Wages of course by
definition do not include SEP-IRA contributions, so any
SEP-IRA contributions escape being taxed as wages.

Question #1: can an employOR contribute 100% of money paid
to the employEE as SEP-IRA money (or any other defined
contribution-type retirement plan)? Theory: why not? if
it complies with the < $44k/yr limit and is otherwise not
considered "excessive"? In other words, giving $44k
clearly would probably be excessive (correct?), if there was
no salary paid; BUT, let's say "profits" or "money left over
after expenses" were a measly $10k, a pittance. Can an EOR
'pay' the EE (remember, it's one and the same person) $10k,
by contributing to the EE's retirement fund (SEP-IRA),
without paying FUTA, OSDI, Medicare, "Social Security taxes"
on these "profits"? Or does the EE first have to pay a
salary (say $5k) and then the remainder (another $5k) go to
fund the SEP-IRA? I say that if the amount ("profits") is
small (less than $10k-$20k), I would imagine the IRS doesn't
care if no "Social Security taxes" are paid on this small
amount.

*Update: I see after typing the above that the SEP-IRA rules
say "25% of compensation" so, given the $10k "profits", an
EOR must first pay $7.5k as 'salary' then pay $2.5k as
SEP-IRA contribution money. Correct?

Is this *update correct?

Question #2: given the sole proprietor scenario above, what
plan (since apparently SEP-IRAs don't work due to the "25%"
rule) allows an employor to pay 100% of any money left over
after expenses ("profits") to the employee (himself)?

RL

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Gene Utterback, EA, RFC, ABA
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      09-14-2006, 03:41 AM
"raylopez99" <(E-Mail Removed)> wrote:

> Facts: sole proprietor with a SEP-IRA. Wages of course by
> definition do not include SEP-IRA contributions, so any
> SEP-IRA contributions escape being taxed as wages.
>
> Question #1: can an employOR contribute 100% of money paid
> to the employEE as SEP-IRA money (or any other defined
> contribution-type retirement plan)? Theory: why not? if
> it complies with the < $44k/yr limit and is otherwise not
> considered "excessive"? In other words, giving $44k
> clearly would probably be excessive (correct?), if there was
> no salary paid; BUT, let's say "profits" or "money left over
> after expenses" were a measly $10k, a pittance. Can an EOR
> 'pay' the EE (remember, it's one and the same person) $10k,
> by contributing to the EE's retirement fund (SEP-IRA),
> without paying FUTA, OSDI, Medicare, "Social Security taxes"
> on these "profits"? Or does the EE first have to pay a
> salary (say $5k) and then the remainder (another $5k) go to
> fund the SEP-IRA? I say that if the amount ("profits") is
> small (less than $10k-$20k), I would imagine the IRS doesn't
> care if no "Social Security taxes" are paid on this small
> amount.
>
> *Update: I see after typing the above that the SEP-IRA rules
> say "25% of compensation" so, given the $10k "profits", an
> EOR must first pay $7.5k as 'salary' then pay $2.5k as
> SEP-IRA contribution money. Correct?
>
> Is this *update correct?
>
> Question #2: given the sole proprietor scenario above, what
> plan (since apparently SEP-IRAs don't work due to the "25%"
> rule) allows an employor to pay 100% of any money left over
> after expenses ("profits") to the employee (himself)?


You are in over your head - a sole proprietor is NOT an
employee, there is NO W-2 because there are no wages.

A sole proprietor pays self employment tax on ALL of the net
income from their Schedule C - whether they take the money
out of the company or not - even whether they take out more
than the net profit.

For a Schedule C filer, the net income is used to calculate
their retirement contribution. The SEP contribution
calculation has to account for the portion of the SE tax
that they get to deduct. There are different ways to make
these calculations. The first, and easiest, is to use the
IRS tables that do the conversion for you - Table 2 shows
the rate to apply to net SE income BEFORE adjusting for SE
tax. However, this tables only work if the net income does
not exceed the OASDI maximum. The second method takes net
income, reduces it by the SE tax adjustment then multiplies
the remainder by the rate to apply to net SE income minus
the adjustment for SE tax (Table 1).

In any case, the sole proprietor (or SMLLC Owner) IS going
to pay SE tax on their net income BEFORE (or regardless of)
any contribution to a retirement plan.

You may want to meet with a local tax pro who can help walk
you through these calculations.

Good luck,
Gene E. Utterback, EA, RFC, ABA

--
Posted via a free Usenet account from http://www.teranews.com

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raylopez99
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      09-15-2006, 02:18 AM
Gene Utterback, EA, RFC, ABA wrote:

> You are in over your head - a sole proprietor is NOT an
> employee, there is NO W-2 because there are no wages.


Let's change the facts a bit: assume a corporation having
one employee.

RL

<< ================================================== ===== >>
<< The foregoing was not intended or written to be used, >>
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<< that may be imposed upon the taxpayer. >>
<< >>
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Harlan Lunsford
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      09-15-2006, 07:24 PM
raylopez99 wrote:
> Gene Utterback, EA, RFC, ABA wrote:


>> You are in over your head - a sole proprietor is NOT an
>> employee, there is NO W-2 because there are no wages.


> Let's change the facts a bit: assume a corporation having
> one employee.


That's simple. I "is" one! lol

My corporation may contribute 25% of my salary into the SEP
plan. And in my case I'm trying to reduce salary as I get
older, so that contribution decreases each year. But I do
save a bit in FICA tax.

ChEar$,
Harlan Lunsford, EA n LA

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<< that may be imposed upon the taxpayer. >>
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raylopez99
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      09-17-2006, 10:00 AM
Harlan Lunsford wrote:
> raylopez99 wrote:
>> Gene Utterback, EA, RFC, ABA wrote:


>>> You are in over your head - a sole proprietor is NOT an
>>> employee, there is NO W-2 because there are no wages.


>> Let's change the facts a bit: assume a corporation having
>> one employee.


> That's simple. I "is" one! lol
>
> My corporation may contribute 25% of my salary into the SEP
> plan. And in my case I'm trying to reduce salary as I get
> older, so that contribution decreases each year. But I do
> save a bit in FICA tax.


Harlan--kindly please expound

Assume this fact: I am a sole corporation (see here:
http://en.wikipedia.org/wiki/Corporation_sole)'

Trust me--I have clearance from the IRS and it is 100% legal
(long story).

RL


<< ================================================== ===== >>
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<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
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Harlan Lunsford
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      09-19-2006, 08:32 AM
raylopez99 wrote:
> Harlan Lunsford wrote:
>> raylopez99 wrote:
>>> Gene Utterback, EA, RFC, ABA wrote:


>>>> You are in over your head - a sole proprietor is NOT an
>>>> employee, there is NO W-2 because there are no wages.


>>> Let's change the facts a bit: assume a corporation having
>>> one employee.


>> That's simple. I "is" one! lol
>>
>> My corporation may contribute 25% of my salary into the SEP
>> plan. And in my case I'm trying to reduce salary as I get
>> older, so that contribution decreases each year. But I do
>> save a bit in FICA tax.


> Harlan--kindly please expound
>
> Assume this fact: I am a sole corporation (see here:
> http://en.wikipedia.org/wiki/Corporation_sole)'
>
> Trust me--I have clearance from the IRS and it is 100% legal
> (long story).


What's to explain? EXcept of course I jokingly referred to
myself AS a corporation, which can't be of course. Legally
I exist and the corporation I own exists, as separate person
under the law. IOW, a natural person cannot be a
corporation.

As for that "sole corporation" thingy, that's a whole
'nother ballgame.

ChEAr$,
Harlan Lunsford, EA n LA

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
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<< to this newsgroup as well as our anti-spamming policy >>
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Drew Edmundson
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      09-19-2006, 06:35 PM
"raylopez99" <(E-Mail Removed)> wrote:
> Harlan Lunsford wrote:
>> raylopez99 wrote:
>>> Gene Utterback, EA, RFC, ABA wrote:


>>>> You are in over your head - a sole proprietor is NOT an
>>>> employee, there is NO W-2 because there are no wages.


>>> Let's change the facts a bit: assume a corporation having
>>> one employee.


>> That's simple. I "is" one! lol
>>
>> My corporation may contribute 25% of my salary into the SEP
>> plan. And in my case I'm trying to reduce salary as I get
>> older, so that contribution decreases each year. But I do
>> save a bit in FICA tax.


> Harlan--kindly please expound
>
> Assume this fact: I am a sole corporation (see here:
> http://en.wikipedia.org/wiki/Corporation_sole)'
>
> Trust me--I have clearance from the IRS and it is 100% legal
> (long story).


See the IRS' Dirty Dozen, number 7:

http://www.irs.gov/newsroom/article/...136337,00.html

If this is what you mean by "sole corporation" then I
recommend you speak with a tax attorney with criminal
experience ASAP. If not then please elaborate.

---
Drew Edmundson, CPA
Cary, NC

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<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
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Drew Edmundson
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      09-21-2006, 01:10 AM
"raylopez99" <(E-Mail Removed)> wrote:
> Harlan Lunsford wrote:
>> raylopez99 wrote:
>>> Gene Utterback, EA, RFC, ABA wrote:


>>>> You are in over your head - a sole proprietor is NOT an
>>>> employee, there is NO W-2 because there are no wages.


>>> Let's change the facts a bit: assume a corporation having
>>> one employee.


>> That's simple. I "is" one! lol
>>
>> My corporation may contribute 25% of my salary into the SEP
>> plan. And in my case I'm trying to reduce salary as I get
>> older, so that contribution decreases each year. But I do
>> save a bit in FICA tax.


> Harlan--kindly please expound
>
> Assume this fact: I am a sole corporation (see here:
> http://en.wikipedia.org/wiki/Corporation_sole)'
>
> Trust me--I have clearance from the IRS and it is 100% legal
> (long story).


I apologize if this is a duplicate. It did not post with
the rest of the messages today and I sent it early
yesterday.

See the IRS' Dirty Dozen, number 7:

http://www.irs.gov/newsroom/article/...136337,00.html

If this is what you mean by "sole corporation" then I
recommend you speak with a tax attorney with criminal
experience ASAP. If not then please elaborate.

---
Drew Edmundson, CPA
Cary, NC

<< ================================================== ===== >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
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raylopez99
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      09-21-2006, 01:29 AM
>> Trust me--I have clearance from the IRS and it is 100% legal
>> (long story).


> See the IRS' Dirty Dozen, number 7:
>
> http://www.irs.gov/newsroom/article/...136337,00.html
>
> If this is what you mean by "sole corporation" then I
> recommend you speak with a tax attorney with criminal
> experience ASAP. If not then please elaborate.


Hi Drew--certain states, CA being one of them, allow certain
professions the right to form a corp. sole (and you don't
even have to be a priest, rabbi or shaman).

RL

PS--after doing lots of due diligence, I've concluded that
it's probably better to pay FICA/Social security taxes on
any "taxable compensation" and pass through said
compensation as "wages" rather than try to use said
compensation to fund a retirement plan. Of course up to 25%
of said "taxable compensation" could be used to fund a
retirement plan (401k/ SEP-IRA, etc) and I might declare a
special dividend this year, and avoid paying FICA/SS tax
that way.

Thanks.

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<< that may be imposed upon the taxpayer. >>
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Bill Brown
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      09-21-2006, 01:29 AM
MoTHIS THREAD IS CLAOSED AS OF TODAY
============================================
raylopez99 wrote:

> Assume this fact: I am a sole corporation (see here:
> http://en.wikipedia.org/wiki/Corporation_sole)'



I went to that link and found this:

**BEGIN QUOTE**

Wikipedia is not an advertising service. Promotional
articles about yourself, your friends, your company or
products; or articles written as part of a marketing or
promotional campaign, may be deleted in accordance with our
deletion policies. For more information, see Wikipedia:Spam.

**END QUOTE**

> Trust me--I have clearance from the IRS and it is 100% legal
> (long story).


I wouldn't trust you as far as I could throw the building my
office is in. And, no you don't and no it isn't.

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