The term, pension, is a little outdated, particularly when it comes to small businesses. Traditionally (and technically), a pension is a Defined Benefit Plan. The employer contributes to these plans, which generally promise the employee a certain amount of income upon retirement, often based on earnings and years of service. Today, defined benefit plans are virtually nonexistent in a nonunionized workforce. Defined Contributions Plans, a program in which employees contribute the majority of the funds to their retirement, have taken their place. Defined contributions plans are vehicles that fund retirement, but they are not pensions.
The phrase, Profit-Sharing Plan, is equally as confusing. The IRS consistently uses it when referring to defined contribution plans, such as a 401-K, but these have NOTHING to do with a firm’s profit.
So, here we are with another Schedule C Line, whose title is confusing at best. To clarify the title, Pensions and Profit-Sharing Plans, think Employee Retirement Costs when you see it. That’s what gets reported on Line 19: Employer contributions and costs related to employee retirement plans.
Costs deducted as Pension & Profit-Sharing Plans: Agents who have employees and offer the benefit of a retirement plan report the following items on Line 19, Pension and Profit-Sharing Plans:
- Administrative Fees related to the management of qualifying plans.
- Employer matches and contributions to plans (NOT employee contributions)
Cost NOT deducted as Pension & Profit -Sharing Plans: The costs below are not deductible on Line 19:
- Amounts paid by employees or deducted from employee paychecks and remitted by the employer to retirement or profit-sharing plans. Include employee contributions deducted from their pay in wages on Line 26 of Schedule C.
- Retirement contributions made for the owner of the business. When deductible, owners report their retirement contributions as an adjustment to income on Form 1040.
- Other employee benefits, such as health insurance, education assistance, or cafeteria plan costs not included in wages. Report these on Line 14, Employee Benefits.
A Common Error: There is an essential caveat to deducting retirement costs on Line 19 of Schedule C – a Real Estate Agent must have employees to do so. Outlays reported on Line 19 are for employer contributions and administrative expenses of employee retirement and profit-sharing plans. Do not deduct contributions or outlays related to the self-employed agent’s retirement on Line 19. In short - agents who do not have employees will leave line 19 blank.
Deducting contributions to the owner’s retirement plan, be it to an Individual Retirement Account (IRA), SEP (Simplified Employee Pension) IRA, Simple IRA, or Solo 401(K) plans, on Line 19 is an all-too-common error - and it’s easy to make when the owner uses off-the-shelf tax software. Entering their retirement contributions on line 19 of Schedule C is enticing because it results in substantially higher tax savings than reporting it elsewhere. Why? Deductions on Schedule C reduce both income and self-employment tax (which is often the owner’s most significant tax).
Unfortunately, deducting owner retirement contributions on Schedule C, Line 19, is incorrect and may flag the return for IRS review. Owner contributions to their retirement accounts are not deducted on Schedule C, even when the owner has employees and contributes to both the employees’ and their plan with the same check. Correctly reporting owner contributions as a 1040 income adjustment will generally reduce income tax due, but not self-employment tax.
Types of Deductible Employer Contributions: Many employee retirement plans qualify for deductible employer contributions on Line 19. Here are a few:
- Retirement Annuities paid by the employer
- 401(K) employer matching contributions
- Simplified Employee Pension (SEP) employer contributions
- Employer contributions to Saving Incentive Match Plan for Employees (SIMPLE IRA) Plans
Deduction Timing: Employer retirement contributions are one of the few exceptions to the cash basis reporting rules. Employers can make and deduct contributions to several plans (including SIMPLE IRA, SEP, and 401-K plans) the following year and still deduct them on the prior year’s return. Employer contributions can be made until the due date of the business owner’s 1040, including extension, and remain deductible for the previous year.
For example, Jill, a commercial Real Estate Agent, offers a SIMPLE IRA plan to her two employees. Under plan terms, Jill contributes the same amount as her employees contribute until her contribution (also called a match) reaches 3% of each employee’s earnings for the year. During 2019, Jill has to remit the funds her employees contribute as they get withheld from their paychecks. But, because Jill is a sole proprietor, she has until the due date of her Schedule C (Form 1040) to make her matching contributions and deduct them on Line 19 of the 2019 Schedule C. The due date for her Form 1040 is April 15th of 2020 unless she files an extension, in which case she must make her matching contribution by October 15 of 2020.
Jill has the same deadline to make contributions to her own SIMPLE IRA account. However, she does not deduct her contributions on Line 19 of Schedule C; she deducts them as an adjustment to income on her Form 1040.
Take Away: Deduct employer contributions and administrative costs of employee retirement plans on Line 19, Pension and Profit-Sharing Plans. If a real estate agent has no employees, there will be no deduction on this line. To repeat: Do not report contributions to the owner’s retirement plan on Line 19 of Schedule C. They get deducted as an adjustment to income on Form 1040. Employer contributions to many retirement plans can be made up until the extended due date of Form 1040 and remain deductible on the prior year’s return.
Summary and Invite: We hope this article has clarified the Pension and Profit Sharing Plan deduction on Line 19 of Schedule C. If you’d like to learn more about cutting your highest cost: TAXES, check out our Real Estate Agent Tax Cut Library. The Real Estate Agent Tax Cut Library includes over eight hours of video broken into twenty-nine searchable volumes and covers every possible deduction a Real Estate Agent can take on their tax return. Our Broker Version will help your entire agency cut their taxes! We also invite you to browse our courses.