Do I Need to Report My Employer's SEP IRA Contributions?
The various types of individual retirement accounts and the different rules regarding each make it very difficult to ascertain when a person needs to report contributions made to these accounts. The rules regarding a Simplified Employee Pension, or SEP, IRA are slightly different because the majority of the contributions are usually made by the employer and not the employee. As the employer receives a tax benefit upon contributing, the employee must pay taxes on the amount when it is distributed.
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Employer's Contributions
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An employer reports all contributions that the company makes on behalf of the employee using Form 5305. An individual need not report SEP IRA contributions unless he is self-employed and makes them for himself or he makes contributions to this account rather than a traditional IRA.
Deductible Contributions
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If a taxpayer makes deductible contributions to his SEP IRA in lieu of contributing to a traditional IRA, he must report them to the IRS in the year that he receives the tax benefit. When he accepts distributions from the account, this IRS taxes these amounts as income and growth at the beneficial capital gains rate. If the taxpayer does not report contributions to the account, then the IRS will not know on what amount to calculate gains. As a result, the IRS will tax the total at the taxpayer's marginal income tax rate.
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Self-Employed
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Making contributions to a SEP IRA as either a self-employed individual, whether a sole proprietor or partner, opens the door for the individual to benefit from the tax deductibility of his contributions. For this reason, he should report any contributions he makes to a SEP IRA. It reduces his taxable income in any given tax year.
Contribution Limits and Excise Taxes
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For an employee, the yearly contribution limits for a SEP IRA are the greater of 25 percent of the individual's annual salary or $49,000. The limits are the same for a self-employed individual who contributes on his own behalf. However, the IRS reduces part of the deduction he may take because of the self-employment tax. If the employer contributes too much in taxes, the IRS may impose an excise tax on either the employer or the employee. Each year, the employer makes available documentation stating how much the company contributed on behalf of the employee. It is important to review these documents.
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