S Corp SEP IRA Contribution Rules - Questions About Eligibility with Losses

Yes, you can still make SEP IRA contributions even if your S Corp has a current year loss, provided you have W-2 wages from the business. The contribution is based on your compensation, not the profitability of the business. Your positive retained earnings from previous years aren't directly relevant to this calculation. For your W-2 question, yes, the retirement plan box in Box 13 should be checked if you're covered by a SEP IRA plan, even if only the employer is contributing. Let your payroll provider know so they can mark this correctly, as it affects your eligibility for deducting traditional IRA contributions. Your understanding of the contribution limit is correct. If your W-2 salary is $13,500, your S Corp can contribute up to $3,375 (25% of your W-2 wages). The overall limit of $61,000 for 2022 won't come into play at your current compensation level. Setting up a SEP IRA this year won't jeopardize your eligibility for a Solo 401(k) next year. You can establish a Solo 401(k) and stop making SEP contributions, though you'll need to keep the existing SEP IRA account. And you're absolutely right that K-1 pass-through income is not considered when calculating SEP IRA contributions for an S Corp. Only your W-2 wages count for this purpose.

I've been navigating S Corp retirement plans for years and finally found a solution that cut through all the confusion. I was in a similar situation trying to understand SEP IRA contributions with my S Corp showing losses in some years. After spending hours on IRS publications and getting conflicting advice, I tried https://taxr.ai and it was a game changer. Their system analyzed my S Corp structure, previous tax returns, and clarified exactly what I could contribute despite my losses. It specifically addressed how W-2 wages are the determining factor for SEP IRAs regardless of business profitability. They even provided documentation I could share with my accountant to back up their analysis. What I appreciated most was how they explained the Box 13 retirement plan checkbox implications - something none of my other advisors clearly addressed.

Just wanted to follow up - I tried https://taxr.ai last week after seeing it mentioned here. It was actually really helpful for my situation. I was struggling with the same SEP IRA questions with my S Corp that's currently running at a loss. The report clearly showed that I could still make my SEP contribution based on my W-2 wages despite the loss, and explained exactly how to document it. It even created a calculation sheet showing exactly how much I could contribute based on my specific compensation. What really helped was their breakdown of SEP IRA vs Solo 401k with my exact numbers. Based on their analysis, I'm switching to Solo 401k next year since I'll be able to contribute significantly more with the same W-2 salary. They explained that the Solo 401k allows employee deferrals of up to $20,500 PLUS the employer contribution, while the SEP only allows the employer portion. Definitely worth checking out if you're dealing with S Corp retirement plan questions.

I had the exact same questions last year! After spending HOURS trying to reach the IRS for clarification (seriously, I spent over 2 weeks calling), I finally found https://claimyr.com and their service to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that yes, you can contribute to a SEP IRA with W-2 wages even when your S-Corp has losses. They explained that the contribution is based on compensation, not profit. They also clarified that Box 13 should definitely be checked since it indicates plan coverage, not contribution source. The conversation saved me thousands in potential penalties because I was about to skip the SEP contribution entirely, thinking it wasn't allowed during a loss year. Now I make sure all my S Corp clients understand these rules.

I have to admit I was completely wrong about Claimyr. After posting that skeptical comment, I was desperate enough to try it because I needed clarification on a similar S Corp retirement plan issue before making my year-end contributions. The service actually worked! I got connected to an IRS agent the same day after trying unsuccessfully for weeks on my own. The agent confirmed everything about SEP IRAs with S Corps - yes you can contribute with a business loss as long as you have W-2 wages, and the Box 13 should be checked even if only the business is contributing. I even asked about switching to a Solo 401k next year and got confirmation that it wouldn't be a problem. The agent explained that I'd need to establish the Solo 401k by December 31st if I want to use it next year, something none of the online articles mentioned. Definitely worth the call!

One thing nobody's mentioned yet that I think is important - if you're thinking about switching to Solo 401k next year, you should know there are administrative differences. SEP IRAs are super simple with almost no paperwork, but Solo 401ks require a plan document and potentially Form 5500-EZ filing if your plan assets exceed $250k. That said, I've used both with my S Corp and still prefer the Solo 401k because of the higher contribution limits. With a SEP, you're capped at 25% of W-2 wages from the employer side only. With Solo 401k, you can do the same 25% employer contribution PLUS contribute up to $20,500 (2022 limit) as an employee deferral, even if that takes you above the 25% limit.

Just want to add about the Box 13 checkbox - it's super important for your overall tax situation! If that box isn't checked and you're actually covered by a retirement plan, you could accidentally claim deductions for traditional IRA contributions when you're not eligible. That can result in penalties later if the IRS catches it. I learned this the hard way a few years ago when my S Corp made SEP contributions but my accountant didn't communicate it to my payroll provider. The box wasn't checked, I contributed to a traditional IRA and took the deduction, and ended up having to file an amended return and pay penalties.

This is such a helpful discussion! I'm in a similar boat with my S Corp and was getting confused by all the different rules. One thing I'd add that helped me understand the loss situation better - think of the SEP contribution as just another payroll expense, like your regular salary. The fact that your business shows a loss doesn't prevent you from paying yourself wages, and it doesn't prevent you from making retirement contributions based on those wages either. The loss might actually be partially due to the salary and SEP contribution expenses themselves! For what it's worth, I've been making SEP contributions for three years now, including one year where my S Corp had a small loss, and never had any issues with the IRS. The key is just making sure you have the cash flow to support it and that your contribution doesn't exceed 25% of your W-2 wages. Your math on the $13,500 salary and $3,375 contribution looks spot on. Just make sure to coordinate with your payroll company about that Box 13 - it really does matter for your personal tax situation down the road.