2 person LLC SEP contribution

[Guest passmf]

If you have a 2 person LLC and only 1 member is actively working in the LLC, can you make a SEP contribution to the active member only?

[Guest Steve Hample]

Did the other person in the LLC receive compensation?

If not, then the person could be excluded under the minimum compensation criterion, thus would not be a "qualifying employee" and then yes, you could make a SEP contribution for only the one person, according to IRS Pub. 590, p.49.

If the non active LLC member did receive compensation, then the question gets interesting. If the person was not "active" in the LLC, can we assume the person had no "active income" from this source and thus an IRA (even via a SEP) would be prohibited? I dunno. Per Pub. 590, "A self employed individual is an employee for SEP purposes." Seems to me this treatment might extend to members of partnerships and LLCs. So a non active LLC member might be considered as an employee and hence active enough to trigger required SEP contributions. I can see it argued either way.

Thinking of the bigger picture, I'd guess the IRS would not require, nor even permit, contributions for inactive partners drawing only inactive income. For the IRS to decide otherwise could open the door to tax abusive LLCs.

Just a guess.

[Gary Lesser]

If the LLC elects to be taxed as a corporation than W-2 income is generally their plan compensation. If taxed as a partnership, then their "earned income" from personal services would be counted (and also subject to self-employment taxes).