Retirement contributions in client books go to different places depending on whose retirement they fund. Contributions for employees are a business expense. A sole proprietor's or partner's contributions for themselves are not, and usually belong in an owner account. The preparer then asks for each total separately, with the dates the payments were made.
Owner versus employee retirement contributions in client books
Retirement contributions split by who benefits. A contribution the business makes for an employee is part of the cost of that employee and goes to an expense account. A contribution a sole proprietor or partner makes for themselves is recorded apart from expenses, because it is claimed on the owner's own return rather than the business's.
IRS Publication 560, Retirement Plans for Small Business, says sole proprietors and partners deduct contributions for themselves on Schedule 1 of Form 1040, and that those owner contributions cannot be deducted as a business expense. Contributions for common-law employees go on the business return: Schedule C for a sole proprietor, Form 1065 for a partnership, and Form 1120 or 1120-S for a corporation.
So a sole proprietor who pays one SEP contribution covering both themselves and an employee needs that payment split into two lines in the books. The owner's part goes to draws or a dedicated owner retirement account; the employee's part goes to an employee benefits expense.
Retirement plan payments as they appear on bank statements
On a statement, retirement payments show up as transfers or debits to a plan provider, often with the provider's name and a short code. Payroll-based plans may appear only inside the payroll provider's withdrawal. The bookkeeper's task is to recognize each one, find out what it covers, and code it by entity type and beneficiary.
A coding table
The payee text and amounts below are made-up examples.
| Statement line (example) | Amount | Sole proprietor books | S corp books |
|---|---|---|---|
| PLANPROVIDER SEP CONTRIB | 12,000.00 | Owner part to draws; employee part to benefits expense | Usually expense, from the plan report; ask the preparer for the owner's share |
| PAYROLL CO TAX AND 401K 0415 | 6,830.25 | Split from the payroll register: employee deferrals to a liability, employer match to expense | Same split from the register |
| ONLINE TRANSFER TO IRA ...5521 | 6,000.00 | Personal, to draws | Shareholder distribution unless the client says otherwise |
| PLANPROVIDER ADMIN FEE | 250.00 | Fees expense, if the plan covers employees | Fees expense |
Two habits keep these lines straight. First, post payroll-based contributions from the payroll register, not the bank line, because one withdrawal mixes taxes, employee deferrals and employer amounts. Second, ask the client what any transfer to an investment account is for. A personal IRA funded from the business account is an owner withdrawal, not a business contribution.
Once a payee's treatment is settled, write a rule so it is coded the same way every month. AutoBankConvert applies each client's rules and past coding to new statements and sends lines it is unsure about to a review queue, which suits plan payments that change amount from month to month.
Which retirement contribution totals does the preparer ask for?
The preparer wants totals by person and by type: owner contributions, employer contributions for employees, and employee deferrals withheld from pay. Each should come with the payment dates and the plan type. Dates matter because a payment made early in the new year may still count for the prior year.
Year-end totals checklist
- Plan type for each plan the client has, such as SEP, SIMPLE or 401(k).
- Owner contributions, with dates and amounts.
- Employer contributions for employees, in total and per employee if the plan report gives it.
- Employee deferrals withheld through payroll, agreeing with the payroll provider's annual report.
- Plan fees paid by the business.
- Any contribution paid after year end that the client says is for the prior year.
Keep the plan provider's annual statement in the year's file. If the books and the provider disagree, the provider's statement is usually the better starting point, and the difference becomes a question for the client.
Retirement contributions made after year end
Some plans allow a contribution for one year to be made after that year ends. Publication 560 says that for a SEP, contributions must be made by the due date of the return, including extensions, to be deducted for that year. The bank line then sits in the new year while the contribution belongs to the old one.
In the books, record the payment on the date it was made. Then tell the preparer, in writing, which year the client intends it for, with the amount and date. Do not reopen a closed year to move the payment back without agreeing it with the preparer first. If a return has already been filed and the numbers behind it change, the guide to handling books that changed after taxes were filed covers what to tell the client and the preparer.
When should a retirement contribution entry be left for the preparer?
Leave the entry for the preparer whenever the question is about limits, eligibility or which year a contribution counts in. The bookkeeper records what was paid, to whom and when. How much the owner may contribute, whether a plan covers the right employees, and how an S corp owner's contribution interacts with their wages are tax questions.
Signs a contribution needs the preparer's eye
- The owner paid a large lump sum in the weeks before the extended due date.
- A new plan was opened during the year and nobody is sure which employees it covers.
- The client asks you how much they can put in this year.
- Contributions for an S corp owner do not match what the payroll register shows.
Record the facts, list the question on the handover notes and move on. The same discipline applies to other records the preparer relies on: the post on meals deduction records shows the habit for a different expense.
A note on client reminders
Many clients forget retirement plans exist until April. A short reminder in the autumn, asking whether they plan a contribution and from which account, saves a scramble later and shows the client you are watching their year. The guide to marketing for bookkeepers treats that kind of useful, timely message as part of how a practice keeps clients.