LLC, Retained Earnings and 401K plans

[jsmith1985]

Hello,

Need to know how to handle income/taxes of a Single-member LLC taxed as a Corporation. Requirement is to have some Retained Earnings in LLC as well as contribute as much as possible to a 401k plan.

Do I need to take wages out of LLC in order to contribute upto 25% of compensation for Employer Profit Share?

Are both wages and distributions included in compensation or just wages? What if LLC had some retained earnings i.e. LLC earns 100K, I take out 60K as wages, LLC contributes 15K as 401k profit share, I take 10K as distribution and leave 15K in LLC for operation needs. Since I've set LLC to be taxed as Corporation, how does the above scenario work?

Thanks,

[ETA Consulting LLC]

When you are taxed as a Corporation, then the Compensation the owner benefits from must be W2 and NOT earned income from self employment. Hence, if the owner received no W-2, then his 415 limit is zero (as W-2 is the Compensation for plan purposes).

For unincorporated businesses (e.g. sole props, Partnerships, and LLCs taxed as such), "Earned Income" from self-employment is the Plan Compensation. So, you're basically utilizing Schedule C minus 1/2 of self employment taxes (and then having this amount reduced by the 'employer' contributions to the plan). Using this method, ALL contributions to the owner would be deducted on the owner's Form 1040 (so his deferrals and nonelective would be on the same line on the Form 1040).

Does this help clarify the distinction?

Good Luck!

[jsmith1985]

Thanks but that is the standard explanation. LLC taxed as a Corporation becomes a hybrid entity.

So, ONE member LLC taxed as C-Corp, would need to pay wages to member, pay payroll taxes, etc. (Does it need to pay Unemployment taxes that C-Corps pay or would the fact that it is still a LLC makes it avoid it?)?

So question becomes how is the rest of cash (after paying wages, contributing to 401k as Employer contribution) distributed? Dividend or Distribution?

What if i'd like to retain some earnings in LLC for operations?

Too many questions :-)

[jpod]

If this is your business you shouldn't be DIY, and seeking help from a message board isn't much better.

[spiritrider]

The first reply outlines the exact basis for retirement plan contributions. With a corporation, distributions (S-Corp) and Dividends (C-Corp) are not compensation and can not be the basis for retirement plan contributions. Note: The employer contribution must come out of corporate income net of expenses including payroll.

Are you really a C-Corp and not an S-Corp? It is unusual for just an individual owner. You are double-taxed on both profits to the corporation and dividends to the individual. Yes, you can retain earnings and it is better to account for large inventories.

[jsmith1985]

The first reply outlines the exact basis for retirement plan contributions. With a corporation, distributions (S-Corp) and Dividends (C-Corp) are not compensation and can not be the basis for retirement plan contributions. Note: The employer contribution must come out of corporate income net of expenses including payroll.

Are you really a C-Corp and not an S-Corp? It is unusual for just an individual owner. You are double-taxed on both profits to the corporation and dividends to the individual. Yes, you can retain earnings and it is better to account for large inventories.

Goal is Retained Earnings for the first several years as well as reduce personal income during this period. Dividend could be zero during that time and thus double-taxation can be avoided.

C-Corp seems to be the only entity that allows for Retained Earnings.

[K2retire]

The first reply outlines the exact basis for retirement plan contributions. With a corporation, distributions (S-Corp) and Dividends (C-Corp) are not compensation and can not be the basis for retirement plan contributions. Note: The employer contribution must come out of corporate income net of expenses including payroll.

Are you really a C-Corp and not an S-Corp? It is unusual for just an individual owner. You are double-taxed on both profits to the corporation and dividends to the individual. Yes, you can retain earnings and it is better to account for large inventories.

Goal is Retained Earnings for the first several years as well as reduce personal income during this period. Dividend could be zero during that time and thus double-taxation can be avoided.

C-Corp seems to be the only entity that allows for Retained Earnings.

What does your accountant say?

[jsmith1985]

The first reply outlines the exact basis for retirement plan contributions. With a corporation, distributions (S-Corp) and Dividends (C-Corp) are not compensation and can not be the basis for retirement plan contributions. Note: The employer contribution must come out of corporate income net of expenses including payroll.

Are you really a C-Corp and not an S-Corp? It is unusual for just an individual owner. You are double-taxed on both profits to the corporation and dividends to the individual. Yes, you can retain earnings and it is better to account for large inventories.

Goal is Retained Earnings for the first several years as well as reduce personal income during this period. Dividend could be zero during that time and thus double-taxation can be avoided.

C-Corp seems to be the only entity that allows for Retained Earnings.

What does your accountant say?

Trying to get more information myself first so that when I go to my accountant, I'm prepared with some details.