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Who is included in a SEP?


Guest Pat Metallic
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Guest Pat Metallic

4 self-employed and independent attorneys who share an office have created a tax entity for their office expenses (ie. office supplies and the use of a secretary). Each pays 1/4 of those expenses and 1/4 of that secretary's W-2 wages.

Question: One of the attorneys wants to set up a SEP for himself. Does he need to include the secretary in the SEP? If so, since he is paying 1/4 of the secretary's salary, can he determine the secretary's contribution based the wages that he shares in the cost (1/4 of total pay)?

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IRS withdrew their shared employee regulations under IRC 414 several years ago (which would have operated in the manner you suggest). The analysis that applies therefore is under IRC 414(m) (affiliated service group). The employee is entitled to have her benefits based on her total compensation, not on the allocated share.

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This is an interesting question for all of us. When you say "tax entity", are you referring to a bank account, a business, or what? I think controlled group and Affiliated Service Groups rules require a for-profit entity to be somewhere in the middle.

Go Fish.

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So now we know how the IRS doesn't think. Using total compensation would seem the more acceptable approach (next to shedding his/her associates). Hope this helps.

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  • 2 weeks later...

Piggy-backing on NO Name’s question…by tax entity, do you mean that they all formed a corporation? Partnership etc? and if so, isn’t there some concern about whether this attorney can establish the SEP for himself instead of the tax-entity establishing the SEP? Under the latter, mustn’t all employees of the tax entity must be allowed to participate in the SEP? ...am I missing something ?

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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Thanks, Appleby

Let's keep this balloon off the ground. I bought Derrin's "Who's the Employer" several years ago. I've since left the company, so the book remains there.

I believe he had a small section addressing shared premises and what was a "business" vs what was simply a bank account, which may be relevant.

May have to re-buy that book someday.

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No Name- next time- get the online version of the book and the CD :D …In chapter 5- Derrin also talks about ‘shared employees’ , who are individuals who work for more than one employer’s who share an office …I will take a look at that later and see how it relates

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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  • 4 weeks later...
Guest Pat Metallic

The "tax entity" is just a checking account with a federal ID #. There are no tax returns filed for it. It is strictly an account that the attorneys put money into to cover office expenses, payroll for the shared secretary, and the secretary's payroll taxes. It is an in-out account with no profits.

Each attorney runs his/her own business with the help of this secretary. I would equate her service as to a person hired for a 2 hour work day (1/4 of an 8 hour day).

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Who's Fed Tax number is it? Is the account designated as a "Special Account" essentially run by one of the employers? Is there an agreement that covers the relationship of the parties in regard to such employees or to the account?

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Guest Pat Metallic

The federal ID # was applied for by one of the attorneys for the checking account. One of the attorneys oversees the transactions of the account to make sure that deposits are made and the bills are paid. We are assuming that there is no formal written agreement between these attorneys, that each shares in the expenses of the offices via the honor system.

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  • 2 weeks later...

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