Correct SEP Compensation for S-Corp Owner

[Jed Macy]

An officer/shareholder/employee is a greater than 2% shareholder in an S-corporation. In Box 1 of his W-2, health insurance is included which is not considered wages for Social Security and Medicare purposes. The S-corporation has a SEP. Is the correct wage to determine the shareholder’s SEP contribution based on: W-2's Box 1 (Wages, tips other compensation) or Box 5 (Medicare wages)?

Or is it Box 1 adjusted by subtracting the included health insurance premiums?

Comment: it seems more Simple to use Box 1 as is; however, it seems odd to allow a retirement contribution based on health insurance.

Your thoughts? And if you have a citation to authority, that would be appreciated.

[Lou S.]

IRS Publication 560 seems to allow some discretion. See Page 4 - Compensation.

https://www.irs.gov/pub/irs-pdf/p560.pdf

[ERICH LAW, PLLC]

Specifically, you may use "wages as defined for income tax withholdings, Box-1 of Form W-2, or the EE's Social Security earnings (including elective deferrals)." In other words - employer's choice, so long as all EE's get the same treatment (I don't mean by getting health premiums paid by the S-Corp).

Quote

Other options. In figuring the compensation of a participant, you can treat any of the following
amounts as the employee's compensation.

• The employee's wages as defined forincome tax withholding purposes.
• The employee's wages you report in box 1 of Form W-2, Wage and Tax Statement.
• The employee's social security wages (including elective deferrals).

Compensation generally can't include either of the following items.

• Nontaxable reimbursements or other expense allowances.
• Deferred compensation (other than elective deferrals).