additonal income for S corp owner

[s2mone]

The S corp owner has received a W-2 compensation payment, additionally he has received 1099 misc. from the same corporation. Compensation in the plan document is defined as W-2 wages or earned income for self-employed individuals.

 

Can we use the 1099 misc. line 3 “other income” as income in addition to the W-2 wages?

 

[Appleby]

Not for purposes of calculating contributions to the plan.  For corporations, only W-2 wages can be considered.

[Mike Preston]

Unless the sole proprietor has also adopted the plan. 

[justanotheradmin]

What does the document say? The basic plan document we use actually says that ALL income of the employer counts , including from entities that have no adopted the plan, as long as the participant has some compensation from an adopting employer during the year. 

If he is the 100% owner of the S-corp, and also a sole proprietor, there would be a control group issue to consider, and then the Employer would likely be both entities, and it's possible the self employment comp would count. 
In our doc - there is a spot in the adoption agreement that the sponsor has to mark if they want to specifically EXCLUDE from the plan comp, compensation from non-adopting related employers. 

Might be worth it to read all the fine details of your basic plan document. 

This is different than when an employee changes from a non-participating entity to a participating entity (or the reverse), or an excluded class to a non-excluded class (or the reverse), as well as different than when an employee only works for a non-participating entity. Those circumstances are addressed slightly differently in our document. 

[justanotheradmin]

I would be more concerned about why he is receiving 1099 comp from the S-corp. That seems like a red flag. What services would be provided on a contractor basis but not an employee basis?

Often I see 1099s issued as comp to avoid payroll taxes. Ultimately it's an issue for the company and their CPA, but I would still question it and ask for clarification. But that's just me. 

 

[ESOP Guy]

Before you decide to use this comp you might want to ask why he is getting a 1099MISC.  It has been a long time since I worked with 1099MISC so I am happy to be told I am wrong but it can be issued for a lot of reasons.  I believe if the company is paying him rent on building he owns he can get a 1099MISC.   If it is something like that it seems like it would be much harder to say that is includeable comp regardless of the plan document because it isn't for services rendered.  

[Bird]

16 hours ago, ESOP Guy said:

I believe if the company is paying him rent on building he owns he can get a 1099MISC.

Which highlights the Q of whether it is "earned" income or not.  When in doubt I ask if someone is paying self-employment taxes.

[Larry Starr]

On 2/1/2019 at 6:50 PM, s2mone said:

The S corp owner has received a W-2 compensation payment, additionally he has received 1099 misc. from the same corporation. Compensation in the plan document is defined as W-2 wages or earned income for self-employed individuals.

 

Can we use the 1099 misc. line 3 “other income” as income in addition to the W-2 wages?

 

The very first thing you need to do is ask the CLIENT why there is a 1099 and what is it for.  Until you know that, all the answers provided here are of no value.  Get that info; then come back and explain.

[jpod]

That it is identified as "other income" rather than "non-employee compensation," and assuming that is accurate, means that it cannot be considered plan comp (plus, as Mike Preston noted, unless the owner has adopted the plan as a participating sole proprietor the point is moot). I think rent is a very good guess, but in the end it doesn't matter.