Top heavy test for small company

[Guest fender5150]

I see IRC 416(i)(A) that a company with 8 employees can have no more than 3 Key employees. Is there a guideline siting who is not a key employee?

Ex:

40% owner makes $40,000 per year

60% owner makes $125,000 per year

2 sons each make $50,000 per year

Do I pick one of the sons? Do I exclude the 40% owner? Can I choose who I exclude as a Key Employee?

Thanks in advance.

[Kevin C]

You are looking at the rule for determining how many officers to count as key employees. That limit only applies to the officer portion of the key employee definition, not the other parts.

If the sons are sons of the owners, you have four key employees. The sons are attributed ownership from their fathers, so all four are more than 5% owners.

[Guest fender5150]

I re-read it right after I hit the send button. Thanks for the quick reply. The first sentence of the paragraph does clearly state "For purposes of clause (i)", and clause (i) is specifically dealing with Officers.

Thanks again!