How You Can Avoid
Incorrect I.R.S. Self-Employed Retirement Deductions
IRS Advice FS-2008-24, July 2008Retirement or pension
plans are not just for big businesses. They are also available for sole
proprietorships. If you are self-employed small business owner or
professional person, you can set up a qualified retirement plan for
yourself and your employees and make annual tax-deductible retirement plan
tax deductions.
If you are a sole proprietor, you can deduct
contributions you make to the plan for yourself. You can also
deduct trustee fees if contributions to the plan do not cover
them.
The Internal Revenue Code provides significant
tax deductions for employers that establish and maintain
retirement plans that comply with the requirements of the Code.
Such plans include Simplified Employee Pension (SEP) plans and
Savings Incentive Match Plan for Employees Individual Retirement
Account (SIMPLE IRA) plans.
Generally under these plans, contributions that
are set aside for retirement may be currently deductible by the
employer, but are not taxable to the employee until distributed
from the plan.
You must set up and fund a qualified retirement
plan such as a SEP or SIMPLE-IRA. No matter what type of plan for
the self-employed you are considering, you must actually make
contributions to a qualified and properly maintained retirement
plan account. This fact sheet provides a quick look at preventing
incorrect deductions for retirement plans.
Qualifications to claim deductions
If you are self-employed, you may qualify for a
tax deduction for contributions you make to a qualified retirement
plan. You must have self-employment income to qualify.
Self-employment income consists of net profits from Schedule C or
Schedule F.
The deduction is the total plan contributions
you can subtract from gross income on your federal income tax
return. Limits apply to the amount deductible. You can avoid
examinations and additional assessments by making sure you qualify
for the deduction.
The self-employed retirement plan
deduction may not be allowable if:
-
Form 1040, Schedule SE, Section A (if
applicable), Line 4, is less than the amount on Form 1040,
Line 28.
-
Form 1040, Schedule SE, Section B (if
applicable), Line 6, is less than the amount on Form 1040,
Line 28.
-
Form W-2 indicates an individual is a
Statutory Employee and the amount in Box 1 is less than Form
1040, Line 28.
Deduction limits for the self employed
If you contribute to your own SEP-IRA, you must
make a special computation to figure your maximum deduction for
these contributions. When figuring the deduction for contributions
made to your own SEP-IRA, compensation is your net earnings from
self-employment which takes into account both of the following
deductions:
-
Deduction for one-half of your
self-employment tax.
-
Deduction for contributions to your own
SEP-IRA.
Use the rate table or worksheets in chapter 5
of IRS Publication 560, “Retirement Plans for Small Business” for
figuring your allowable contribution rate and tax deduction for
your SEP-IRA plan contributions.
Deducting contributions
When to deduct contributions for a year depends
on the tax year on which the SEP is maintained.
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.
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.
For example, you are a fiscal year taxpayer
whose tax year ends June 30. You maintain a SEP on a calendar year
basis. You deduct SEP contributions made for calendar year 2008 on
your tax return for your tax year ending June 30, 2009.
The allowable deduction for yourself is
reported on your Form 1040 Line 28.
More information
There are many other factors to consider when
choosing a retirement plan that is right for you and for your
business. A retirement plan has many benefits, including investing
in the future now for financial security when you retire. As a
bonus, you may qualify for significant tax advantages and other
incentives.
Publication 560, Retirement Plans for Small
Business, is a valuable resource for computing self-employment
income and determining limitations on SEP and other retirement
contributions and deductions.
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