S-Corp Income?

[dmb]

An employee of an LLC (no ownership) is also a 100% owner of his own S-Corp. If the income of his S-Corp comes from the LLC, can it be used for the S-Corp's profit sharing plan??? Thanks.

[Ron Snyder]

This is confusing. (1) A rank and file "employee" of an LLC also has an S corporation that contracts with the LLC to provide services? or (2) The owner of an S corporation has a contract with an LLC to provide personal services to the LLC for which the S corporation is paid? Which is it?

This sounds a little fishy, like a special deal was made for a principal in a business so that he/she would not have ownership and could establish his/her personal retirement plan without covering other employees. If so it is likely to be deemed to be a management company under 414(m)(5) (no overlapping ownership required).

[GBurns]

This is a very common situation.

For example, the Office Manager (or any other employee) of an LLC, creates an S-Corp of which they are the sole shareholder. This S Corp secures orders or a contract from the LLC to supply an item or service that the LLC needs, Gift Baskets, Janitorial service, pest control spraying, car wash, office supplies, catering etc etc.

The LLC is the only client that the S Corp has and These orders or contracts are the sole source of revenue. The revenue generates a profit of $4,000 per year which the OM (or other LLC employee) does not need for current expenses and desires to use the $4,000 to fund a retirement plan. The LLC might or might not also have a retirement plan.

Can the S Corp set up a plan with the sole shareholder as the only participant?

If not, can the sole shareholder use this K1 income to fund any sort of retirement plan? What sort and what restrictions etc?

[Mary Kay Foss]

S Corp income can NEVER be used for retirement plan contributions. A corporation must pay salaries.

LLC income can be used for retirement plan contributions as long as it's SE income. A corporate LLC member doesn't have SE income.

[SoCalActuary]

I see a few issues in this discussion.

1. Is the new S-corp member really independent or a common-law employee due to the economic control of the LLC? Would the LLC cease to make any payroll tax payments? The two entities should agree to go through the tests applicable to the federal and local state laws that determine employment vs independent contracter status.

2. If the new S-corp is truly considered independent, then the S-corp has to divide receipts between W-2 compensation and S-corp earnings or dividends, where the first part (W-2) is subject to payroll tax and is counted toward pension plan benefits, but the second part (S-corp dividends) is not counted. However, the pension plan benefits are deductible in the 1120-S before the dividend is calculated.

3. If the S-corp provides management services, then the affiliated service group rules should be reviewed to verify the level of management services provided. If so, then the S-corp must be aggregated with the plans of the LLC for 401(a)(4) testing, since the plan would have a participation ratio in 410(b) of 0% on its own. (0 NHCE's benefit, while 100% of HCE's benefit.)