1099 income

[Scuba 401]

if a shareholder in the corp receives some income in the form of a w-2 and other income on a 1099 what plan definition do i need for his 1099 compensation to be counted?

[12AX7]

What does the plan document say for the elected comp definition? For example, the W-2 definition of comp in my document includes self-employed income, which I'm assuming is your situation. Maybe one of the accountants here can give insight as to why I also see this on rare occasions.

[Scuba 401]

What does the plan document say for the elected comp definition? For example, the W-2 definition of comp in my document includes self-employed income, which I'm assuming is your situation. Maybe one of the accountants here can give insight as to why I also see this on rare occasions.

the plan says w-2 wages means wages for federal income tax withholding, plus all other payments to an employee in the course of the Emloyer's trade or business, for which the Employer must furnish the Employee a written statement under code section 6041, 6051 and 6052.

[K2retire]

Frequently when an individual receives both W-2 and 1099 income from a corporation that they own it is to avoid paying Social Security taxes on part of the income by structuring part of the payments as dividends (that show up on the 1099). Dividend income is not included in "all other payments to an employee in the course of the Emloyer's trade or business, for which the Employer must furnish the Employee a written statement under code section 6041, 6051 and 6052." However, if the 1099 is flowing to a Schedule C, it could be included in that definition.

[Scuba 401]

Frequently when an individual receives both W-2 and 1099 income from a corporation that they own it is to avoid paying Social Security taxes on part of the income by structuring part of the payments as dividends (that show up on the 1099). Dividend income is not included in "all other payments to an employee in the course of the Emloyer's trade or business, for which the Employer must furnish the Employee a written statement under code section 6041, 6051 and 6052." However, if the 1099 is flowing to a Schedule C, it could be included in that definition.

it is not dividends in this case. i believe it is flowing to a schedule C in the form of commission payments. the payments are coming from the sole proprietorship of one of the other shareholders.

[Bird]

So you have a corporation owned by multiple shareholders, presumably this corporation sponsors the plan?

And you have one shareholder who has a sole proprietorship who is paying another shareholder directly and reporting that on a 1099, which effectively means the receiving party has his own sole proprietorship.

Well, if the corporation is indeed sponsoring the plan, then, in theory at least, the sole proprietorships have nothing to do with anything; i.e. you ignore the 1099 income. If the sole props are adopting employers, then you need to consider the 1099 income. If the sole props have employees, then there's a whole 'nother set of worries about coverage. (I'd bet that someone is going to be unhappy about something at the end of the day because they don't truly understand the consequences of sloshing money around as they appear to be doing.)

[Guest naveen]

An aside to the original question;

If an employee (door to door salesman) of a corporation receives a W-2, for say $X, plus a variable commission for $Y (not reported on W-2 but is 1099 income for the salesman, i.e. no SE taxes paid on $Y), plan definition of compensation does not exclude commission; can the plan us $ X+Y for allocations / benefit calcs? Anything that we should specifically look out for (TH min, Gateway, etc..)?

For 2010 X = 50,000 and Y = 100,000

[K2retire]

On what basis does the employer not report the commission on the W-2?

[Bird]

An aside to the original question;

If an employee (door to door salesman) of a corporation receives a W-2, for say $X, plus a variable commission for $Y (not reported on W-2 but is 1099 income for the salesman, i.e. no SE taxes paid on $Y), plan definition of compensation does not exclude commission; can the plan us $ X+Y for allocations / benefit calcs? Anything that we should specifically look out for (TH min, Gateway, etc..)?

For 2010 X = 50,000 and Y = 100,000

The problem is that these arrangements are very seldom legitimate. Only in rare circumstances should someone be paid both as an employee (W-2) and an independent contractor (1099), and that's when they are performing wholly different functions. That doesn't sound like the case here. The commissions should probably be reported as wages, implying that it might be appropriate to add X+Y for plan purposes, but since the employee is probably paying self-employment taxes on Y, Y isn't really the right number to use, but what is? Although the IRS would likely deem Y to be wages, I'd honestly be uncomfortable using X+Y for plan purposes because it's an awkward way to fix the real problem of misreported wages.

[masteff]

IRS Pub 15-A, page 5, Statutory Nonemployees, Direct Sellers.

Can't say if spliting the person's income like that between W-2 and 1099 is correct but being a statutory nonemployee is why.

[austin3515]

I just took a read through, but noticed that it appeared to be an all or none determination.

As has already been suggested, a desire to avoid payroll taxes and insurance (and perhaps retirement benefits) is generally the motivation to use 1099 income. And you can bet that will be the IRS's assumption!