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Comp paid in an LLC


bzorc
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Client is a single member LLC. However, single member gave himself a salary for 2008 and reported it on a W-2. LLC has net income after deduction for salary.

Client wants to establish a SEP. What's the contribution calculated on? 20% of net self-employment income? 25% of comp? A blend? Aargh!!!

Any help would be appreciated.

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I am assuming that the LLC did not make an election to be taxed as an association (i.e., as a corporation). You should check with your client to make sure that assumption is accurate, in which case the LLC is disregarded for tax purposes.

To do your calculations correctly, you have to ignore the W-2. You also have to ignore the employer share of FICA taxes paid by the LLC, if any were paid.

So, you start with the net income of the LLC as reported to you, add back the compensation reported on the W-2 and any employer FICA taxes paid. You end up what is essentially the earned income for this individual Schedule C filer, which is what he really should be. You do your calculations from that point as you would for any other Schedule C filer.

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Apparently this practice of setting up an LLC taxed as a partnership or sole prop, but still taking wages, is common, even though it is wrong, at least as I understand it. I would use the wages (and have done it), but also take into account the profit or loss.

Ed Snyder

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