Wednesday, August 13, 2008


I’m looking into the specifics of setting up a SIMPLE IRA once I completely convert over to being self-employed.

Here are a few interesting things I ran into so far:

Employer matching contributions:
You are generally required to match each employee’s salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee’s annual compensation. This requirement does not apply if you make non-elective contributions as discussed later.

Lower percentage:
If you choose a matching contribution less than 3%, the percentage must be at least 1%. You must notify the employees of the lower match within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. You cannot choose a percentage less than 3% for more than 2 years during the 5-year period that ends with (and includes) the year for which the choice is effective.

Tax Treatment of Contributions:
You can deduct your contributions and your employees can exclude these contributions from their gross income. SIMPLE IRA plan contributions are not subject to federal income tax withholding. However, salary reduction contributions are subject to social security, Medicare, and federal unemployment (FUTA) taxes. Matching and non-elective contributions are not subject to these taxes.

Reporting on Form W–2:
Do not include SIMPLE IRA plan contributions in the “Wages, tips, other compensation” box of Form W–2. However, employee deferrals must be included in the boxes for “Social security wages” and “Medicare wages and tips.” Also include the proper code in box 12. For more information, see the Instructions for Form W–2.

So that means self-employment tax is charged on IRA money that is taken out of “salary” money, whereas the money I put into the IRA from the company is not taxed.

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