SEP sponsor changes from Sch C to sub-S corp

[M Norton]

SEP is sponsored by a Sch C entity.  Now that entity has become a sub-S corporation.  Can the SEP sponsorship be changed to the new entity?  They want to maintain the same eligibility instead of starting over - also wouldn't mind keeping the same SEP IRA accounts.

Thanks!

[Flyboyjohn]

Execute a new SEP adoption form listing employer as "ABC, Inc. as successor to ABC sole proprietor".

My opinion you can continue same waiting period for eligibility and look back at prior years service with sole prop.

Using same IRAs for deposit of new employer SEP contributions perfectly OK.

 

[Luke Bailey]

I second Flyboyjohn's analysis.

[Bill_M]

I believe the the two entities would fall under the controlled group rules. Thus, service at the Sole Proprietorship would count towards meeting the requirements at the S-corp's SEP plan.

[FPGuy]

Sched. C income is QBI; W-2 wages are not. I know I am going off subject, but if the business is not an SSTB, is the conversion losing the owner a valuable tax benefit?

[Flyboyjohn]

On the contrary going to S corp could be more advantageous than staying Sch C.

Think of it this way- the amount of SE income converted to S corp wages loses the 20% QBI deduction but the spread saves the SE tax, either 15.3% or 2.9% depending on income level (and isn't there an additional .9% Obamacare add on?)

The give up on the wage component  only "costs" 4.8% (20% x 24% bracket) in forgone QBI deduction.

So lower income (under SSTWB) taxpayers come out way ahead (15.3% vs 4.8%) and higher income are only slightly disadvantaged (4.8% vs 2.9% or 3.8%).

 

 

[FPGuy]

Not sure I agree with Flyboyjohn.

Wholly owned S-corp. pays employer half of SS tax of owner-employee comp. Owner-employee pays other half. Coming out of two different pockets, but both below to OE and in aggregate equals SECA tax OE pays as Sched. C filer.  Does save on the 0.9% Medicare surtax, if it applies, as employer does not match.

The employer portion of SS taxes is deductible; and a sole proprietor gets to deduct half of the SECA tax.