Question

How to set up SEP IRA contribution. What expense account do I use?

Forum|Forum|7 years ago
October 16, 2018
43 replies
236 views

My company is a LLC taxed as an S-Corp. I have just established a SEP IRA. I am the only owner and have my wife on payroll as an employee.

The company will be makeing all of the contributions to the SEP. I have been reading through some Q&A but can't identify what sort of expense account to set up to record these SEP contributions. I have seen some say "Employee Benefits Expense" account but there is no such option in QBO chart of accounts.

What is the appropriate expense account to set up and record these SEP contributions to?

QuickBooks Online

qbteachmt

Level 11

"you will need to make two journal entries:"

Actually, no, you don't need to make a JE at all. First, in payroll there is a provision for Benefits (taxable and nontaxable types) as "Company Contribution" so this can be "run through payroll" as part of allowing for Computation, even if it is not reported on the 940, 941, W2, etc. This is helpful when something is "based on wages" or Earnings.

"One increasing he IRA fund (set it up as a Banking account of type trust)"

You never track an IRA account in the Business data file; that IRA account is a Personal account owned by a Person. The Employer might be sending funds there, but that is not a Bank type of activity (asset accounting) for the Business entity.

"and decreasing the business checking account"

"And Decreasing Checking" = Write Check (entering an expense transaction). Now you can list the actual Payee, as well, because Banking menu has the banking tools. This would be instead of using payroll processing simply for computation, even as something set for Tax tracking as None. This would be, for instance, the employer paying out the Employer's optional contribution at year end, and they didn't want to compute anything relative to employee names throughout the year.

"(or recording the means of payment if not from business checking), and one journal entry debiting retirement plan expense and crediting retirement plan liability."

You don't need one JE, much less more of them.

If you use the "expense check" (even if ACH or EFT, and Paperless) to show the spending from Checking, you would list what you just paid out. You paid out Expense or you paid out Liability. And the way to Accrue that liability would be through payroll processing. And if you did that, you cannot treat that as a typical and regular "expense" entry; you would pay it out as any other tax-type liability.

So, it is always helpful to remind folks that you nearly never use JE in any QB product or program; and not for Banking; and not for something you computed through payroll. And not when Names are involved; paying out to brokerages = having a Payee name on the check expense or paying that from your liability tools from payroll, because you decided to compute it through payroll.

And often it is easier to wait until year end for the Employer Options, to see how much is available, or required to meet your Plan documents. For the Shareholder-employee, it often helps to wait until year end, because your Computed allowances takes into account your K-1 earnings and your W2 earnings. It's a bit more complicated, for you.

L

ltsburien-bk

This is a SEP IRA, not a SARSEP. (See page 7 of IRS Publication 560 for the difference.) To date, company contributions are 100%, shareholder-employees contributions 0%. I also confirmed the SEP is set up under the business name of the S-Corporation to conform with the requirements of pub 560 regarding SEP IRAs. Current tax law permits the S-Corporation to contribute up to $54,000 or 25% of the compensation of the employee, whichever is less. Moreover, with a SEP IRA, matching is not required. I think when you mention the "Benefits section" you are talking about QB DESKTOP payroll, rather than QB ONLINE payroll. I am using QB Online Essentials payroll. QB Online Essentials does not appear to have a Benefits section. When setting up company contributions in payroll deductions under payroll settings, QB ONLINE does support SARSEPs, but NOT SEP IRAs established 1997 or later. So although I would love to do this through payroll, it does not seem possible until they update QuickBooks Online Essentials payroll with this option.

Also, if one uses the write check function in QBO, and enter a liability account below, it will DECREASE the amount of the liability.

D

dcells

This post was in 2018 and is still true today (QBO does not support SEP-IRA). Do you have a 2021 solution on recording entries to handle a SEP-IRA? Thanks.

qbteachmt

Level 11

"I am the only owner and have my wife on payroll as an employee."

Do you Work for the business? Because that means you also are an Employee. There is no Owner. You might be a Shareholder-Employee, or just Shareholder and do not do any work.

There is no such thing as Nonemployee if you Work for the company. This is a very costly error; I have attached some IRS wording for you. You still have time to Correct this before year end.

"The company will be makeing all of the contributions to the SEP. I have been reading through some Q&A but can't identify what sort of expense account to set up to record these SEP contributions. I have seen some say "Employee Benefits Expense" account but there is no such option in QBO chart of accounts."

Then add one, make a new expense account. The W2 needs to indicate "Covered by retirement plan" as well.

https://www.irs.gov/retirement-plans/operating-a-sep

L

ltsburien-bk

If you are an S-Corporation, as an owner(shareholder), you should be paying yourself a wage. For state/local tax purposes you are likely to be exempt from state unemployment and worker's comp. since these entities disregard owners as employees. For federal taxes however, you must still make your 941 filings and payments, even if the only employees are shareholders.

Now about the SEP IRA contribution: Since QBO does not support SEP IRAs (though it DOES support SARSEPs set up before 1997 - see page 7 of IRS pub 560 for the difference) through payroll, you will need to make two journal entries: One increasing he IRA fund (set it up as a Banking account of type trust) and decreasing the business checking account (or recording the means of payment if not from business checking), and one journal entry debiting retirement plan expense and crediting retirement plan liability.

J

Janice65713

Thank you.. Creating a Trust Account worked. This type an account shows a positive Balance. Creating a Liability account only serves to create a negative Liability.

qbteachmt

Level 11

"Current tax law permits the S-Corporation to contribute up to $54,000 or 25% of the compensation of the employee"

And you also just stated this: "To date, company contributions are 100%, shareholder-employees contributions 0%."

That is the Employer's Optional amount as expense. I covered this. You can simply put this on an "expense" check, when you pay it out, such as at year end, you determine what is affordable.

"I think when you mention the "Benefits section" you are talking about QB DESKTOP payroll, rather than QB ONLINE payroll. I am using QB Online Essentials payroll. QB Online Essentials does not appear to have a Benefits section."

This does not need to run through Payroll; it isn't reported on any tax form or payroll form. You should have a Benefits section of Expense. Yes, all payroll provides for Benefit types of activity, but you don't need it, for Employer Optional Amount, unless you want to accrue it through the year, such as Compute on Gross. You know this exists; it is similar to any other Tax type, such as FUTA is employer-paid only, and based on Gross.

"When setting up company contributions in payroll deductions under payroll settings"

It's not a Deduction .

Here, read these articles:

https://community.intuit.com/articles/1643602-deductions-and-contributions

https://community.intuit.com/articles/1459298-add-or-edit-a-new-deduction-or-contribution-in-online-...

"So although I would love to do this through payroll, it does not seem possible until they update QuickBooks Online Essentials payroll with this option."

Read those articles.

"Also, if one uses the write check function in QBO, and enter a liability account below"

If you decide to wait until year end or some Periodic payment, there is no Liability. This is a basic accounting function; you are simply Paying out that expense, now. You don't Pay a liability that you didn't accrue; you Pay it as expense, because you are Right Now paying it. Paying it as liability is an error. And you don't need to accrue it as liability just to turn around and pay it out as liability; why would you make that many entries for one thing to be paid right now?

L

ltsburien-bk

The articles you referenced are for QuickBooks Online FULL SERVICE payroll. Yes, the correct term for this is a contribution, but it is SET UP in the same place as a payroll deduction under QuickBooks Essentials payroll (as opposed to full service payroll). Full Service payroll is easy to set up this kind of contribution: just call the payroll people at QuickBooks and they set all of it up for you. QuickBooks Essential payroll you have to do the work yourself.

To set up a SARSEP payroll contribution in QBO Essentials payroll, the steps are as follows: Gear icon, payroll settings, on the top line that says setup click "Deductions" then where it says create deductions/company contributions, add a New Deduction/Contribution.

However, a SEP is NOT the same as a SARSEP (see IRS pub 560), and is UNSUPPORTED by QBO Essentials payroll (see this article here: <a rel="nofollow" target="_blank" href="https://community.intuit.com/articles/1437402">https://community.intuit.com/articles/1437402</a> ). A SARSEP can NOT be established after 1997, though contributions may still be made. A SEP IRA does NOT permit salary reductions to contribute to the SEP.

If the contribution was paid out to the employee through the SEP plan over the course of the year, of course there would be no liability at year's end. However, retirement is about 10 or 20 years away. When setting up an asset account in QuickBooks ONLINE, of type banking, there is a subtype trust. For trust accounts, these are accounts set up on behalf of another party (not the company). Therefore, this seems the best account to use to take the SEP into consideration, since the SEP account is set up in the name of the business on behalf of the shareholder employee. The liability takes into consideration that the money in the SEP is owed to the shareholder employee ( to be withdrawn upon retirement).

I have seen other answers on here that suggested to debit Retirement Expense, and credit Retirement Liability.

K

krcroteau

I have a similar situation with a Simple IRA. Please see below. Thank you.

I'm a 1 person S-Corp where I am the single employee. I just transferred from QB Desktop to QB Online.

Both my Employee & Employer Simple IRA contributions are falling under my Payroll Expense Retirement Account. I'm not sure if this is correct.

As an example, each month the Company Contribution or employer contribution is $60 while the employee contribution or deduction is $1,041.66 for a total of $1.101.66. I think something is wrong with my payroll setup, what account should the employee contribution / deduction fall under? It seems it's going to Payroll Liabilities. The Total $1,101.66 transaction each month is initiated from Vanguard.

Greatly appreciate it. As a small business owner who some years makes less than $50k I love to learn. Thanks.

qbteachmt

Level 11

@krcroteau

Your Check on the 28th is an Error.

Here is how this works: On the 22nd, because of the Paycheck, the Gross Wage expense for the employee is not fully paid to the employee. The Employee's share of taxes, and IRA, are held back. That makes this amount Not paid out of Checking, seen as a Liability (to be paid out later, instead of being part of takehome).

As a result of the setup, the Employer Share of taxes and the Employer's share of IRA is also computed. It is posted for the 22nd as Expense, and since it was not immediately paid out, it is also seen in Liability for the 22nd.

Later, these are NEVER banking checks as CHK. They are all Special. They are Liability Checks, because they are part of Payroll activities. They are never Expense; the Expense was posted as part of the computation on the 22nd. The 28th simply is the Banking, that the Liability Payment happened.

It doesn't matter that Vanguard "pulls" the funds. You need to do the Bookkeeping of the Liability Payment, and for Check #, you can put EFT or ACH, to show you did not issue this as a paper check. You want to show how much Vanguard took this time, as a Payroll Liability check activity.

Hope that helps.

K

krcroteau

I migrated from QB Desktop and Intuit Online Payroll to QB Online in June 2018 and this is how they set it up?

When you say that my Check on the 28th is an error do you mean the amount, incorrect account, or that it shouldn't exist at all? My Wages account shows the entire monthly salary of $2,000 as payable?

I am so frustrated with Intuit. I own stock in this company and I am irate at this migration.

Can you please advise? Thank you.

J

jcpepwave

Did you ever get a good solution to this using QB online? I am in a similar situation including an LLC filing as an S-Corp. My wife and I are the only employees. I pay salary quarterly through an third party service and I contribute to a SEP IRA once a month. Need to go back and put amounts in QB but I am not sure of the most appropriate way.

JoesemM

QuickBooks Team

Hi, @jcpepwave.

You have to activate and set up your payroll account within QuickBooks Online, so you'll be able to enter the amounts in QuickBooks. Here's how:

Go to Workers from the navigational menu, then select Employees.
Choose Get set up to begin the setup process.
Enter the company and employee information.
Select the pencil icon in the Pay section. Scroll down on the deductions section. Then select +Add deductions.
Select Retirement Plans under Deduction/Contribution type. Then select the type of Retirement plan ( SEP-IRA).

See this article for more detailed instruction: Retirement plan deductions/ contributions.

Once done, you have to record your wages, taxes, and the tax payments in your payroll tax page.

In the left menu, click Taxes.
Go to the Payroll Tax tab.
On the Payroll Tax Center page, hit Pay Taxes.
Choose the Tax Payment Due you want to pay, select Create Payment.
In the Approve Payment window, pick Make Payment Myself.
Choose the Bank Account used when paying the tax.
For the Payment Date, select Other and enter the actual date the payment was made.
Enter the Check Number (Optional).
Once done, hit Record payment.

Also, you can ask your third-party payroll provider if they can track your SEP-IRA plan.

To learn more about recording tax payments in QBO, check these articles:

Please let me know in the comment section if you need additional help. I'm here to lend a hand. Keep safe always.

M

mail4prashanth

Why I am not seeing SEP-IRA as an option under Type field for Deductions?

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