What is the best tax treatment for contributions made to employees’ IRAs?

by Eric J. Seidman, CPA | Jul 09, 2018

A lady is the sole owner of an LLC that is organized as a C corporation. She makes contributions out of the business account to a personal Roth IRA for herself and some of her employees. What would be the tax treatment for each of these contributions?

Under IRC Sections 401-409, an employer may deduct contributions paid to a qualified pension, stock bonus, or profit-sharing plan if the plan meets certain requirements for qualification. Two examples of plans that could potentially qualify for deductions are a simplified employee pension plan (SEP) and savings incentive match plan for employees (SIMPLE).

Pennsylvania has adopted the federal treatment of pension, profit-sharing, and stock bonus contributions. Assuming the contributions are made through a qualified pension, stock bonus, or profit-sharing plan, the LLC may deduct the contributions made for the owner and her employees on both the federal and Pennsylvania corporate returns.

If contributions are not being made pursuant to a qualified plan, the contributions may be non-deductible to the LLC or taxable as wages to the employees and as a dividend to the sole shareholder. The specifics of the situation matter greatly here, and a tax adviser should be consulted for a more in-depth analysis of the situation.

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Answered by: Eric J. Seidman, CPA, is with Wouch Maloney & Co. LLP in Horsham, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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