Where to Report SEP IRA Contributions on Form 1120S
Learn how to properly report SEP IRA contributions on Form 1120S, ensuring accurate tax treatment for both employer and employee contributions.
Small business owners operating as S corporations and offering retirement benefits through a SEP IRA must ensure contributions are reported correctly on their tax return. Proper classification of these expenses affects corporate deductions and shareholder reporting.
Accurately entering SEP IRA contributions on Form 1120S maximizes deductions while maintaining compliance with tax laws.
Employer Contributions for Owners and Employees
S corporations with a SEP IRA must allocate contributions correctly between owners and employees. Employers contribute directly to individual accounts based on a percentage of each participant’s compensation. For 2024, contributions are limited to the lesser of 25% of an employee’s eligible compensation or $69,000.
For employees, compensation includes wages reported on Form W-2, excluding certain fringe benefits. Shareholder-employees, considered employees for tax purposes, can only base contributions on their W-2 wages—distributions or non-wage income cannot be used. This prevents shareholders from exceeding contribution limits.
Contributions must be uniform. If an S corporation contributes a set percentage of wages for one eligible employee, the same percentage must apply to all, including shareholder-employees. This ensures fairness and prevents favoritism toward owners.
Where to Enter on Form 1120S
SEP IRA contributions are recorded as an employer expense on Form 1120S, reducing taxable income. These amounts should be reported on line 17 under “Pension, profit-sharing, etc., plans,” ensuring they are deducted before determining net income, which then flows through to shareholders.
Businesses must retain payroll reports, plan documents, and bank statements to support deductions in case of an audit. Proper records also confirm contributions remain within IRS limits.
Since SEP IRA contributions are an employer expense, they do not appear on an individual’s W-2, distinguishing them from elective deferrals or employee contributions to other retirement plans. Employees do not need to report these contributions on their personal tax returns.
Characterizing Deductions
SEP IRA contributions are employer expenses, not employee compensation. Unlike salaries or bonuses, they are not subject to payroll taxes, including Social Security and Medicare, providing savings for both the company and employees. Since these contributions are excluded from taxable wages, they do not increase an employee’s adjusted gross income, potentially preserving eligibility for tax credits and deductions.
The timing of contributions affects deductions. SEP IRAs allow contributions up until the tax filing deadline, including extensions, but delaying payments too long can create cash flow issues. Allocating funds throughout the year instead of making a lump sum contribution near the deadline can help businesses manage finances while securing the deduction.
For businesses with fluctuating income, contribution limits may be affected. Since contributions are based on a percentage of compensation, lower earnings reduce the allowable deduction. Companies anticipating lower profits should assess contribution levels carefully to avoid overcommitting funds.
Coordination with Schedules K and K-1
Once SEP IRA contributions are deducted on Form 1120S, they must be reflected on Schedules K and K-1 for accurate pass-through reporting. Schedule K summarizes the corporation’s income, deductions, and tax attributes, which are then allocated among shareholders on Schedule K-1 based on ownership percentage.
On Schedule K, SEP IRA contributions are reported on line 17 under “Pension, profit-sharing, etc., plans,” matching the deduction on Form 1120S. This amount is then allocated to Schedule K-1, appearing in box 12 with code R. Since S corporation income and deductions pass through to shareholders but do not impact self-employment tax, these contributions do not affect an owner’s self-employment tax liability. This differs from retirement contributions made by sole proprietors or partners, which do impact self-employment tax.
Distinguishing W-2 Wages from SEP Contributions
Properly distinguishing W-2 wages from SEP IRA contributions is necessary for tax compliance. Shareholder-employees receive compensation through payroll, and their retirement contributions must be based exclusively on these wages. Misclassifying distributions or other non-wage payments as eligible compensation for SEP IRA purposes can lead to disallowed deductions and IRS scrutiny.
W-2 wages include salary, bonuses, and taxable fringe benefits but exclude shareholder distributions, which are considered a return on investment rather than earned income. If an S corporation owner takes minimal wages while receiving substantial distributions, their SEP IRA contribution limit will be lower. The IRS has challenged cases where shareholder-employees underpay themselves in salary to reduce payroll taxes while maximizing retirement contributions. Reporting reasonable compensation on Form W-2 before calculating SEP IRA contributions helps avoid compliance risks and potential penalties.