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Single K - for S Corp - Dividend income VS salary


Guest anne3583
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Guest anne3583

I have a new client who wants to establish a retirement plan for 2004. They are both partners in an S Corp. They are divorced husband and wife. A 60/40 split of ownership. They have drawn approx $20,000 in Salary for 2003 and $30,000 in dividend.

My 1st questions - can the dividend + the salary be used as basis for their contribution? I think it can because it flows through to their personal returns.

#2 - Because they are divorced, is a Single K an option for these clients?

Thanks for your response

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The instructions to Form 5500 EZ which is the form used for filing an owner-only 401(k) specify that the form can be used for a plan which only covers one or more partners (and spouses) in a partnership. Therefore, you can use an owner-only 401(k) plan for your clients, even though they are divorced. You should note that this refers only to partners in a partnership. A plan which covers two unmarried owners of a corporation would, presumably, not meet this definition and be unable to file a 5500EZ.

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I just realized you said they were in an S-Corp. I saw the word partner and focused on that. Based on the instructions to the 5500-EZ, I'm not sure an S-Corp would qualify under the partnership rule. my last naswer may have confused you a little because I didn't get the whole question. :rolleyes:

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The dividend income can not treated as plan compensation. See Durando v. US 70 F3d 589 (9th Cir 1995).

In most likelyhood, the dividend income does not represent economic reality and the individual be treated as employess receiving wages for services essential to the operation of the business. Thus, the "dividend" income may be subject to FICA and FUTA. See Grey's Public Accountant c Comm (119 TC No. 5) and Veterinary Surgical Associates, PC v Comm (117 TC No. 14, Oct. 15, 2001); see, too, Yeagle Dywall, TC Memo 2001-284. That being said, if invested corporate capital--as opposed to services--generated some gain, then dividend treatment might be an appropriate pass through to some extent.

If you have access to the SIMPLE, SEP, and SARSEP Answer Book, see Q 6:4.

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