subchapter S corps and compensation

[eilano]

Can subchapter S owners count pass through income for plan compensation?

[mbozek]

I have always thought that comp for benefits purposes only inlcudes wages, self employment income, commissions or other payments for personal services and that pass throughs which represent other amounts such as dividends or capital gains were not wages even if paid to the shareholder of an S corp. I dont have a cite-- its just an instinctive answer. Wages for various purposes in determining benefits use either the W-2 definiton or 415 defintion of compensation.

[Guest b2kates]

I agree with mbozek. My understanding is that comp for plan purposes generally is subject to FICA taxation. even in partnership plans, the k-1 compensation is subject to FICA. Unearned or passive income is not comp for plan purposes.

[actuarysmith]

I don't have a cite, However I know for certain that Sub-S shareholder employees cannot count K-1 (or pass through) for retirement plan purposes. Only earned income subject to payroll taxes is considered.

You might want to check 414(s). This section deals with compensation. Also see, 415©(3)(B). Finally see 401©(2).

Come to think of it - I guess I do have cites! Don't they make some kind of cream or oitment to get rid of that?

[Kirk Maldonado]

actuarysmith:

You are a cite for sore eyes. Or maybe you cause sore eyes, I'm not sure which.

[Mike Preston]

DURANDO v. U.S., 76 AFTR 2d 95-7464 (70 F3d 548), 11/16/1995 , Code Sec(s) 404

[Belgarath]

Also PLR 8716060, where IRS opined that a shareholder is ineligible to contribute to a qualified plan on the pass-through income. 'Cause it wasn't "earned income."

[actuarysmith]

See 401©(2) - it defines earned income.