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Can this individual adopt a SIMPLE plan?


Guest Fishchick
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Guest Fishchick

The situation is that the individual considers herself self-employed, although her "vendor" issues a W2 and withholds taxes, but does not include her in their plan (she is a mortgage loan processor that works with a bank).

I think that most likely their plan is just excluding her in a class, and because the plan can still pass testing, that's okay. I don't see how the bank could treat her as an employee by issuing a W2, and then have her still be self-employed. She claims that she files a Schedule C as well, but on that same income. This bank is her only "customer". If they were treating her as a vendor, wouldn't they issue a 1099 rather than a W2?

The individual has a SIMPLE plan already and has been contributing routinely.

If this is legit-- Can someone please explain how this works?

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Look for the regulations on "statutory employees", typically sales reps who set their own working conditions but sell only for one company.

W-2 income does not count for SIMPLE or SEP of the sole proprietor. It can only count for 401(k), 403(b) 457 or other employee deferral in an employer sponsored plan, or as an IRA contribution.

Schedule C income alone is used for the SIMPLE or SEP.

Does the person have both W-2 and 1099 income shown as separate items in 1040?

If so, the W-2 shows as wages, and the W-2 indicates whether the person is covered by an employer sponsored plan. The 1099 would show as income in Sched. C, subject to SE tax, and possibly eligible to sponsor a separate plan.

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Self employed persons eligible to establish a SEP or simple plan can make contributions based upon net earnings from self emplyment reported on 1099s. Employees receive w-2. Only an employer (self employed person) can establish a qualfied, SEP or Simple plan. An employee who receives a w-2 can establish a qualified plan, SEP or Simple plan for any Sked C income received. See IRS pub 560 P 4 for definition of SE net earnings.

mjb

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Although W-2 income is not EI (for a SEP or QP) or NESE (for a SIMPLE). The issue of whether the individual is classified correctly has not been addressed. Dual status may also be possible. If the person is a statutory employee (see IRC 3508; and the individual wd have to be exclusively paid based on sales or output) then they are also an independent contractors (sole-proprietor) and can establish a plan to the extent they have earned income or NESE. A statutory employee is not subject to FICA (and in some cases FUTA), and generally make estimated tax payments. I do not believe this individual can be classified as a statutory employee (does not fit into one of the four classifications). Being paid on a W-2 could be incorrect if the individual is SE. If self-employed, the amounts are not subject to federal income tax withholding or social security taxes.

You might wish to check out the IRS Audit Guidlines and the 20 factor test of Revenue Ruling 87-41. For an excellant treatise, see, Derrin Watson, Who's the Employer, chapter 2 (www.employerbook.com).

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