Yet another Self-Employment Issue

[Laura Harrington]

We are finding more and more accountants are telling us that when they figured the amount of self-employment earnings for line 14 of the K-1 they have already taken into account the self-employed individual's (SEI's) own contribution.

Now, I am not an accountant, but I have researched the self-employment issues with regards to qualified plans extensively. My understanding of the way it SHOULD be done is that only the deduction from the common law employees would be taken out before computing the amount for line 14. The deduction for the SEI's own contribution is taken on the Form 1040.

Has anyone else been told this? Am I wrong in my statement about how it should be done?

If the accountant's are doing it this way, are you grossing up the amount on line 14 by the SEI's own contribution before calculating the deduction for 1/2 of the self-employment tax (which again I believe should be the proper way since my understanding is that the self-employment tax is figured before the deduction for their own contribution)?

Let me know your thoughts!

Thanks,

Laura

[Mike Preston]

Your understanding is correct. Nobody I've dealt with has mentioned this "new" method, so I haven't had to undo it for my purposes.

[Bird]

Agree, SE tax s/b based on earnings before the contribution. I haven't had this particular situation, but in other cases where I know numbers are suspect, I try to specifically ask for what I need; in this case "ok, so what exactly is the self-employment income BEFORE taking into account the owner's contribution?" If I couldn't get a direct response then I guess I'd add back the contribution...of course when YOU are the one calculating the contribution, and there are other participants involved and you wind up with a different number, then it gets interesting...

[Laura Harrington]

Agree, SE tax s/b based on earnings before the contribution. I haven't had this particular situation, but in other cases where I know numbers are suspect, I try to specifically ask for what I need; in this case "ok, so what exactly is the self-employment income BEFORE taking into account the owner's contribution?" If I couldn't get a direct response then I guess I'd add back the contribution...of course when YOU are the one calculating the contribution, and there are other participants involved and you wind up with a different number, then it gets interesting...

Thanks both of you.

We've been adding the numbers back in, but what worries me is that the accountant's are not changing anything on the K-1, which means the partner really isn't calculating their SE tax correctly when they complete Form SE. But I guess it is not my responsibility to make sure people are paying the right amount of tax!

[K2retire]

Where I used to work, we did the calculations as you described and sent a copy of the calculation to the CPA.

Where I work now, we tell the client to have their accountant do the calculation. It is terrifying how many CPAs have no idea where to begin.