Ways to Report SIMPLE IRA Contributions on a W-2
Aug 14, 2022 By Susan Kelly

Employers with less than one hundred workers may open a SIMPLE IRA for their employees. The Internal Revenue Service (IRS) mandates that employers that provide their workers with access to SIMPLE IRAs must record certain information on such accounts on the W-2 forms of those employees.

The Operation of SIMPLE IRAs

A simplified individual retirement arrangement, or SIMPLE IRA, is an individual retirement account that is intended for use by employers that have fewer than 100 workers. For a company to be eligible to provide a SIMPLE IRA to an employee, the company cannot provide any other kind of retirement plan. Employees who participate in the contribution program can defer a portion of their pay to do so. The maximum amount that may be contributed to a SIMPLE retirement plan each year is $13,500 in 2021 and increases to $14,000 the following year, 2022. Catch-up payments are allowed for participants aged 50 and older, and the maximum annual contribution is $3,000.

Employers are required to make annual contributions and have the option of either making matching contributions based on employee contributions, which are referred to as elective contributions or making contributions that are not based on employee contributions, which are called nonelective contributions. There are two different paths open to employers. They may also:

  • Contribute each year to the plan and match up to three percent of the employee's yearly income who is participating in the plan, or
  • Contribute an amount equivalent to 2% of each qualified employee's compensation as a nonelective contribution, regardless of whether or not the employee chooses to make elective deferrals.
  • As soon as the SIMPLE IRA program is launched, participants' contributions are immediately 100% vested. On the other hand, in-service withdrawals are counted as income and are subject to the same taxes as other income. In addition, members under the age of 59 and 12 may be liable to a 10% early withdrawal penalty imposed by the Internal Revenue Service. The withdrawal penalty is increased to 25% if withdrawn from the account during the first two years after it was issued.

Choose A SIMPLE IRA Plan

Because they enable both employers and workers to contribute money to retirement accounts, SIMPLE IRA plans have the potential to be a major source of income during retirement. The expenses of establishing and maintaining a SIMPLE IRA plan are much lower than those of a traditional retirement plan.

  • Open to any small businesses, often those with less than one hundred workers
  • The employer can offer no other retirement plans.
  • There is no obligation for the employer to file any documents.
  • Contributions: Employees have the option to donate to several funds.
  • The employee is always fully entitled to (or has ownership of) all of the money in the SIMPLE IRA.

The Pros and Cons:

  • Setup and operation are simple and not too pricey.
  • The employee and the employer share the obligation for an employee's retirement.
  • There is no need for discriminatory testing.
  • Inflexible contributions
  • Compared to other retirement plans, lower contribution limitations are allowed for this one.

The employee and the employer must make a contribution. The total amount of contributions that may be made to an employee's SIMPLE IRA are capped. In most cases, an employer is not required to submit paperwork. Participant loans are not allowed under this policy. It is forbidden to utilize the assets as collateral in any transaction.

Simple IRA W-2 Reporting Requirements

Most small businesses with 100 or fewer employees are eligible to establish a SIMPLE IRA. This is because the SIMPLE IRA functions in a manner that is comparable to that of other employer-sponsored retirement plans, such as a 401(k) plan. As a result, each participant employee must report salary deferral contributions on the W-form. The employee's payments to a SIMPLE IRA are taken from the "wages, tips, and other remuneration" box on the Form W-2 for employee compensation, and box 13 "retirement plan" is chosen. There is no explicit listing of the monetary amounts that make up the total yearly payments; rather, the taxpayer is responsible for calculating and reporting those amounts.

The federal government does not withhold income tax from donations made to SIMPLE IRAs. On the other hand, payments made via salary reduction are subject to taxes for Social Security, Medicare, and the federal unemployment insurance (FUTA) program. Still, nonelective donations and matching contributions are exempt from these taxes. On the other hand, the employer can claim a deduction on Schedule C of the company's business tax return for any matching payments provided to the participant. Because the employer may claim a tax deduction for the contributions, the employee's W-2 form will not include the firm's matching amounts.

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