How to Record Employee IRA Contributions in QuickBooks Online (QBO)?

Employee Individual Retirement Account (IRA) contributions are deposits made to an employee’s account for their future, providing a personalized retirement vehicle that complements employer plans, with features such as deferred growth (traditional) or tax-free growth and withdrawals (Roth).

To record employee IRA contributions in QuickBooks Online (QBO), you will need to have a subscription to any of the plans of QuickBooks Online Payroll, such as Core, Premium, or Elite. Each type of IRA is handled differently in QBO primarily because of its distinct tax treatment (pre-tax and post-tax contributions) and the specific payroll liabilities and reporting associated with each plan (e.g., Traditional, Roth, SEP, SIMPLE).

In this article, you will get easy-to-follow solutions for recording, tracking, and paying the three primary types of IRA contributions using QuickBooks Online and its payroll feature, ensuring you remain in compliance with Internal Revenue Service (IRS) regulations.

Types of IRA Contributions

The types of employee IRA contributions in QBO are mentioned below, along with the employer’s role, the QBO deduction method, and tax treatments:

1. SIMPLE IRA: A SIMPLE IRA (Savings Incentive Match Plan for Employees) is an employer-sponsored retirement plan. Since it involves both employee pre-tax deductions and mandatory company contributions (matching or non-elective), it must be tracked directly within your QBO Payroll settings.
2. Employee Personal IRA (Payroll Deduction IRA): Some employees ask their employer to send a portion of their net paychecks directly to their own personal traditional or Roth IRA. This is not a qualified employer-sponsored plan deduction. Employee’s Personal IRA is a post-tax remittance of net wages.
3. Simplified Employee Pension (SEP) IRA: In a SEP IRA contribution is typically an employer-only contribution and is often used by sole proprietors or small business owners for themselves. Since this is an external business expense and does not involve employee salary deduction, it must be tracked manually outside of QuickBooks Online Payroll.

How to Set up SIMPLE IRA Contributions in QuickBooks Online?

A SIMPLE IRA is an employer-sponsored plan tracked via QBO Payroll deductions and contributions. Here are the steps to add the SIMPLE IRA Plan in QBO:

1. Navigate to the Employee Section:
   • From the left navigation bar, go to Payroll, then select Employees.
   • Click on the name of the employee who is enrolling in the SIMPLE IRA plan.
2. Access Deductions & Contributions:
   • Find the Deductions & contributions section and click Start or Edit.
3. Add the Retirement Plan:
   • Select + Add Deduction/Contribution.
   • Under Deduction/contribution type, select Retirement Plans.
   • For the specific Type, select SIMPLE IRA.
4. Set Up the Employee Deduction (Pre-Tax):
   • Fill in the plan name and provider.
   • In the Employee deduction section, choose whether the contribution is a fixed dollar amount or a percentage of gross pay.
   • Enter the contribution rate (e.g., 3%).
5. Set Up the Company Contribution (Employer Match):
   • Scroll down to the Company contribution section.
   • Choose the calculation method (e.g., Match a percentage of the employee’s contribution or Match a fixed percentage of gross pay).
   • Enter the match percentage or amount and specify any annual maximum.
6. Save the Settings:
   • Select Save, then Done. The payroll system will now automatically calculate both the employee deduction and the company contribution on every paycheck.

Note: Ensure your tax-tracking type is correct. QBO should automatically set this up for a SIMPLE IRA so that the employee contributions are pre-tax (reducing taxable wages) and Box 12 of the employee’s W-2 is checked and populated.

How to Record an Employee’s Personal IRA Contributions in QuickBooks Online Payroll?

For an employee’s personal IRA contribution, do not create a new payroll deduction item (like you did for the simple IRA). Doing so implies the contribution is pre-tax, which is incorrect for a standard personal traditional or Roth IRA, and will result in incorrect W-2 reporting.

Here are the steps to split the employee’s net pay deposit between two bank accounts: their primary checking account and their IRA bank account.

1. Access Employee Payment Method:
   • Go to Payroll > Employees.
   • Select the employee’s name.
   • Find the Payment method or Pay section and click Edit.
2. Set Payment Method to Direct Deposit:
   • From the Payment method dropdown, select Direct deposit.
3. Set Up the Deposit Split:
   • Choose the option for Direct deposit to two accounts (split by dollar amount or percentage).
   • Account 1 (IRA Account): Enter the IRA provider’s routing and account numbers (provided by the employee). You must specify the amount to be sent here first, either a fixed $ amount or a % of Net Pay.
   • Account 2 (Primary Checking): The system automatically sends the remainder (balance) of the net pay to the employee’s primary checking or savings account.
4. Save:
   • Click on the Save button.

Pro Tip for Personal IRA: Since the contribution is paid from the employee’s net pay, the transaction simply moves funds from your business bank account to the employee’s IRA account (Account 1) and checking account (Account 2). No additional tax forms or liability tracking are necessary in QBO for this specific transfer of net pay.

How to Record SEP IRA Contributions in QuickBooks Online?

The following steps will guide you through setting up the necessary accounts and accurately recording SEP IRA contributions in QuickBooks Online to ensure your payroll and tax reporting remain correct.

1. Create a Dedicated Expense Account:
   • Go to the Accounting menu, then select Chart of Accounts.
   • Click New to create a new account.
   • Account Type: Select Expenses.
   • Detail Type: Select Pension and profit-sharing plans (or a similar, appropriate detail type).
   • Name: Name the account clearly, such as “SEP IRA Company Contribution Expense.”
   • Select Save and Close.
2. Record the Contribution Payment:
   • Go to the + New button and select Check or Expense (depending on how you paid).
   • Payee: Enter the name of the financial institution that holds the SEP IRA account.
   • Payment Account: Select the business bank account the funds were drawn from.
   • Date: Enter the date the contribution was made.
   • Category/Account Details: Select the new expense account you created: SEP IRA Company Contribution Expense.
   • Amount: Enter the contribution amount.
   • In the Memo field, specify the tax year and the owner/employee the contribution is for.
3. Finalize the Transaction:
   • Click Save and Close.

Pro Tip for Owner SEP IRA: This method ensures the contribution is correctly classified as a deductible business expense on your Profit & Loss statement, and it avoids polluting your payroll records. The contribution amount must be manually entered on the owner’s/employee’s personal tax forms (e.g., Schedule C or Form W-2, Box 13 checked).

How to Verify IRA Liability Amounts in QuickBooks Online?

After running payroll and making manual contributions, the final steps are verifying the amounts and physically sending the funds to the retirement plan provider. Here’s a step-by-step guide for the same:

1. Access the Reports Menu:
   • From the left navigation bar, go to Reports.
   • Search for Payroll Summary by Employee Report (or simply Payroll Summary).
2. Run and Customize the Report:
   • Set the desired date range (e.g., current quarter).
   • Select Run report (or Customize and then Run report).
   • Verification: Review the report to see the totals for both the “SIMPLE IRA Deduction” (employee portion) and the “SIMPLE IRA Company Contribution” (employer portion) for each employee.
3. Locate Total Liabilities:
   • Go to the Taxes or Payroll menu, then look for the Payroll Liabilities center.
   • This center shows all accrued, unpaid payroll deductions and contributions (including the SIMPLE IRA amounts) that are due to third-party payees.

Making the Payment to the Financial Institution

1. Record Payment in QBO:
   • From the Payroll Liabilities center, you can select the retirement liability item and record the payment (usually via check or electronic funds transfer).
   • Alternatively, go to + New and select Check.
   • Payee: Enter the Retirement Plan Provider’s name.
   • Category/Account Details: Select the relevant Payroll Liability Account for the SIMPLE IRA.
   • Amount: Enter the total amount due (employee deduction + company contribution).
2. Make the Physical Deposit:
   • QuickBooks does not automatically send these funds. You must manually initiate the transfer or wire the funds from your business bank account to the retirement plan provider’s account.

Managing IRA contributions in QuickBooks Online requires recognizing the critical difference between a W-2-based payroll deduction (SIMPLE IRA) and an after-tax fund transfer (Personal IRA) or a manual business expense (SEP IRA). By following these three distinct paths, you ensure accuracy in your books and compliance with your payroll tax forms. When in doubt, always consult with a Certified Public Accountant (CPA) at Dancing Numbers.

---

Frequently Asked Questions