W-2 Employee becomes partner mid-year

[tjw572]

I have a plan where one of the employees went from a W-2 employee to a partner.  He received a W-2 and K-1 income.  While I agree that the two pieces need to be added together to calculate the profit sharing contribution, I am being told to ignore the fact that the participant was a w-2 employee when doing the earned income calc for the profit sharing contribution (i.e. not reduce Earned income by employer contribution for their share of the contribution on their w-2 compensation) and also adjust the SS Wage base for this individual. I looked in the ERISA Outline book and can't find anything specific on this. 

Can anyone shed some light on this or provide a solid reference siting?

[ETA Consulting LLC]

I think that whomever 'told' you this is offering a consistent calculation given the odd circumstances.  We know two things about partnership compensation: 1) Employer Contributions to the Employees are made prior to the partner's calculation of SE Tax; and 2) Each Partner takes a deduction against is own 'earned income' for contributions made to his own account (and this calculation is after SE Tax has been calculated).

So, if this partner was an 'employee who received W-2' during the first part of the year, then that percentage contribution would seem to be an employer contribution that would be calculated prior to any 'circular calculation' for deriving at the final earned income amount for each partner.  It seems as merely an additional step to your calculation.

Good Luck!

[K2retire]

But watch for meeting the Social Security wage base -- you have to consider the W-2 withholding amount in the calculation of SE tax.

[Tom Poje]

while not exactly what you have, suppose you had 2 allocation groups

1. partners

2. the common folks

so now how would you calculate?

the LRMs say

The employer contributions allocated to each participant allocation group will be allocated among the employees in that group in the ratio that each employee’s compensation, as defined in section _____ of the plan, bears to the total compensation of all employees in the group. In the event that an eligible employee is included in more than one participant allocation group, the participant’s share of 

the employer contribution allocated to each such group will be based on the participant’s compensation for the part of the year the participant was in the group

in that case you would 'ignore' the W-2 comp. I don't see how your situation is that much different. you have '2 groups' each getting the same % of contribution