S corporation income issues

[Gary]

say an individual is an S corp.

if on the individual's 1040 he shows S corp income of say 50,000 and no other compensation.

can the 1120S make a ret plan contribution for that individual and can the individual make a 401-k salary deferral?

thanks ,

gary

[Mary Kay Foss]

The S corporation income will not support a 401k or any other kind of retirement plan contribution. There must be earned income; which is generally income subject to social security or self-employment tax.

In an S corporation, salary is needed for a retirement plan contribution or 401k deferral.

[GBurns]

K1 income is not salary, wages or other compensation.

No salary or wages means no salary deferral.

[Belgarath]

Mary Kay - I've always understood that it must be W2 income. Question - is there any type of "earned income" that would be eligible that is NOT W2? Thanks!

[Mary Kay Foss]

With an S corporation it would definitely be W-2 income. I was just speaking generically because directors (receiving Forms 1099), consultants, partners and other self-employed people can use Form 1099 income for plan contributions. A partner or LLC member can use K-1 income, if it's SE income, to support the contribution to a retirement plan.

[Guest susa]

Please help with a related question. (Please forgive my ignorance) Is the deductible retirement plan contribution for the LLC member the full 25% of their income? Thanks.

[Appleby]

It depends :

If the LLC is organized as a partnership- the percentage is 20 ( similar to a sole proprietorship)

If the LLC is organized as a corporation, it is 25 percent of W-2 wages.

[Guest DNH]

With an S corporation it would definitely be W-2 income. I was just speaking generically because directors (receiving Forms 1099), consultants, partners and other self-employed people can use Form 1099 income for plan contributions. A partner or LLC member can use K-1 income, if it's SE income, to support the contribution to a retirement plan.

Can S corp distributions be included as considered compensation IF taxes are withheld from the distributions? And if always W2 income for S corps, can you tell me where that citing is? I've been trying to find it. Greatly appreciated, Donna, APA TPA President

[J Simmons]

Those who are both owners and employees of an S corporation can receive payments from the S corp either as wages (reported in Forms W-2) and as dividends. That which is received as dividends is passive, not earned income and thus not compensation for qualified retirement plan purposes.

[GBurns]

DNH

What sort of taxes would be withheld from S corp distributions ?

Distributions/dividends are not W-2 income, so I do not understand the request for a cite ? Cite regarding what ?

[anspai]

Ok, Can someone confirm or deny the following:

Assume I'm an S-Corp owner and I receive $50,000 in W-2 wages and then I also take an additional $50,000 in taxable shareholder distributions then it is my understanding that I can defer up to the max (2009 $16,500 or $22,000) from my W-2 income and then I can also make a profit sharing contribution equal to 25% of K1 income.

[Belgarath]

Denied. Your contribution is based upon W-2 only. The K-1 "pass through" income is ineligible for consideration for qualified plan contribution purposes.

[Mike Preston]

Belgarath, since W-2 and K-1 are the same, is it possible that anspai meant to type "W-2" rather than "K-1" at the end of the question? In that case, would you still deny?

[K2retire]

Belgarath, since W-2 and K-1 are the same, is it possible that anspai meant to type "W-2" rather than "K-1" at the end of the question? In that case, would you still deny?

Generally an S-corp K-1 will be reporting only investment income, not earned income for retirement plan purposes. The W-2 would report the ONLY income that can be considered.

[Bill Presson]

Belgarath, since W-2 and K-1 are the same, is it possible that anspai meant to type "W-2" rather than "K-1" at the end of the question? In that case, would you still deny?

Generally an S-corp K-1 will be reporting only investment income, not earned income for retirement plan purposes. The W-2 would report the ONLY income that can be considered.

Mike knows that. He was just wondering if the OP mistyped the question. Guess we'll have to wait and see.