BACKGROUND:

I have a Single-Member LLC and have not given up my Disregarded Entity status. I have no employees. I pay myself no wages and no salary. Every so often I take Owner Draws from the company and this is the money I use to live on.

I want to create a SEP-IRA to save for retirement in a tax-deferred manner. My tax preparer has told me the amount I am able to contribute for last year, and I have chosen a brokerage with whom I would like to create the SEP-IRA.

PROBLEM:

The paperwork from the brokerage asks me to define "Compensation" via the following question:

For purposes of Employer Contributions, Compensation will mean all of each Participant’s (select one):
Option 1: W-2 wages.
Option 2: Section 3401(a) wages.
Option 3: 415 safe-harbor compensation.

I believe that the purpose of this is to determine who is eligible to participate in the SEP-IRA and/or what percentage of the contribution each participant receives. As the only person in the company, I want to participate and I want to receive 100%.

Unfortunately the person I spoke to from the brokerage says they cannot advise me on which option to pick. They've referred me to my tax preparer, who says that I ought to ask the brokerage. So I'm stuck in a loop where no one can answer my question.

QUESTION:

My major concern is that two of the options seem to discuss "wages", W-2's, and other things which don't seem to apply to me. But I've never heard of "415 safe-harbor" so I can't confidently pick that without knowing what it is.

Which of these options should I pick in order to be eligible to participate and receive 100%?

“I have a Single-Member LLC and have not given up my Disregarded Entity status. I have no employees. I pay myself no wages and no salary. Every so often I take Owner Draws from the company and this is the money I use to live on.”======= For IRS purposes. a SMLLC is a disregarded entity. Ultimately when you file your 1040, you will have to report all profits reported on Sch C/ Sch SE of 1040 whether the funds stay in your business bank account or not. You, as a SMLLC owner, would pay yourself through the equity account owners draws. This essentially will keep an accurate record of what you pay yourself from the current year's profit without inaccurately decreasing the amount of profit that will show on your financial reports at the end of the year. So, since you elected to be taxed as a “disregard entity, you will be taxed as a sole proprietor. That means that ALL business profit flows to your schedule C. There is really no need to pay yourself a salary. The best thing to do is to write a check to yourself as cash flow allows, tracking that in a ‘draw’ account.

“I want to create a SEP-IRA to save for retirement in a tax-deferred manner. My tax preparer has told me the amount I am able to contribute for last year, and I have chosen a brokerage with whom I would like to create the SEP-IRA.”======= When you start your own business, one of your goals is to save more for retirement, but the other plans’ costs were too excessive. the best option is the SEP-IRA, which offered you a popular low-cost alternative.An SEP is ideally suited for small businesses and may be established by any business owner, including sole-proprietorships. The SEP is attractive to small businesses because it is easy to establish and administer. If you want to establish a retirement plan for your business and you missed the last deadline to establish a qualified plan, you may want to consider establishing an SEP. While qualified plans must be established by the end of the plan year ,Dec 31 for plans maintained on a calendar year, SEPs may be established by the business's tax-filing deadline, including extensions. This plan also offers many other attractive features. You may decide each year whether to contribute to the SEP. This is an attractive feature for a new business that has not established a trend in its annual earnings. Because of this flexibility, you could decide to forgo the SEP contribution in years when profits are less than anticipated.ALSO, you, as a business owner, may be eligible to receive a tax credit for expenses incurred when establishing the SEP. You may also be able to deduct plan expenses, including contributions made to the plan; small business owners find the SEP IRA attractive because of its minimal administrative requirements. Unlike qualified plans, the SEP does not require non-discrimination testing or filing of 5,500 returns. Establishing an SEP IRA can be easy. Unlike employers with qualified plans, the employer of an SEP has no responsibility for providing assistance with investing plan contributions. Individual participants may select their own IRA provider and direct their investments.

For an individual who is not self-employed, compensation included in determining SEP contributions includes:

•wages, tips, and other compensation from the employer subject to income tax withholding under section 3401(a),•amounts described in Internal Revenue Code Section 6051(a)(8), including elective contributions made under a SIMPLE IRA plan, and•compensation deferred under a 457 plan The calculation of how much can be contributed to a SEP IRA is dependent on whether your business is a corporation and you receive a W-2 as compensation or if you are taxed as a sole proprietorship and receive compensation as personal income. Option 1/2/3 are NOT for you; as an S or C corp, an incorporated partnership or a LLC electing to be taxed as a corporation pays the business owner a W-2 salary. In this situation, the annual SEP IRA contribution can be between 0% to 25% of the owner's W-2 salary up to the SEP IRA contribution limit. SEP IRA contributions are generally 100% tax deductible as a business expense.SO, When a SEP IRA is established for a unincorporated business such as a sole proprietorship, unincorporated partnership or a LLC electing to be taxed as a sole proprietorship, annual contributions are made into your SEP IRA account between 0 to 20% of your net adjusted self employment income (or net adjusted business profits). SEP contributions are flexible and the percentage of contribution can be changed at any time and may be skipped in a bad year. SEP IRA contributions are generally 100% tax deductible from personal income. When a SEP IRA is established for a unincorporated business such as a sole proprietorship, unincorporated partnership or a LLC electing to be taxed as a sole proprietorship, annual contributions are made into your SEP IRA account between 0 to 20% of your net adjusted self employment income (or net adjusted business profits). SEP contributions are flexible and the percentage of contribution can be changed at any time and may be skipped in a bad year. SEP IRA contributions are generally 100% tax deductible from personal income. Net adjusted self employment income is calculated by taking gross self employment income on Sch C /Sch SE and then subtracting business expenses and then subtracting 1/2 of the self employment tax. An annual SEP IRA contribution can be made between 0% to 20% of that figure up to the annual SEP IRA contribution limit. SEP IRA contributions are flexible and the percentage of contribution can be changed at any time. SEP IRA contributions are generally 100% tax deductible from personal income.SO, For purposes of the SEP plan rules, a self-employed individual’s compensation means net earnings from self-employment determined under Internal Revenue Code section 1402(a).

Section 1402 - Definitions, Earnings From Self Employment

Thank you so much for your help! As you said that none of these options was for me and I couldn't find any way to avoid this particular question, I ended up opening a SEP-IRA at a different brokerage that didn't ask it.