Form 1120-S Schedule K-1

[coleboy]

Hi,

We recently received K-1 for the partners. I'm not as familiar with the K-1's For the Form 1120-s as I am with the others. That being said, I'm not sure where to find the earnings that I will need to be used in the profit share allocations.

Can someone direct me?

Thank you!

[C. B. Zeller]

Form 1120S is the return for an S-corp. S-corp shareholder-employees receive a W-2 from the corporation. Use their earnings on the W-2 and disregard the Schedule K-1.

[coleboy]

Hi,

According to the payroll system, these people received no W-2 income yet they want to be included in the profit share allocation. Hence, the reason why they sent these K-1's. Should tehy have Sched. C income?

[K2]

Not without w-2. 

 

https://www.irs.gov/retirement-plans/retirement-plan-faqs-regarding-contributions-s-corporation

[Bill Presson]

1 hour ago, coleboy said:

Hi,

According to the payroll system, these people received no W-2 income yet they want to be included in the profit share allocation. Hence, the reason why they sent these K-1's. Should tehy have Sched. C income?

They're SOL. What they're likely trying to do is get out of paying FICA, etc.

[Larry Starr]

2 hours ago, coleboy said:

Hi,

According to the payroll system, these people received no W-2 income yet they want to be included in the profit share allocation. Hence, the reason why they sent these K-1's. Should tehy have Sched. C income?

Sounds like the screwed themselves.  I would suggest you have a discussion with the accountant for their firm and ask him/her what they were thinking by not paying income.  The accountant should know that is a Bozo No-No, and if he/she doesn't, he/she should be fired.  Is there a chance that they are not actively involved in the operation of the business and that's why they don't have a W-2?  And if that is the case, then they also are not employees and can't be in the plan.  Let us know what you find out.

[shERPA]

Did the S-corp pay the shareholders' medical insurance?   I believe this is properly included on the W-2 for more than 2% shareholders.  It's probably not enough to get them much of a plan allocation though.  But if they/their CPA didn't know that 1120S K-1 is not plan compensation, they might not be reporting the medical properly either.   

[coleboy]

As a follow up to this, the client states that these 2 individuals do not receive income from the company, only profit distributions. They said they had made it clear when they set up the plan. I was not aware of this at all. This is an S-Corp.

[shERPA]

1 hour ago, coleboy said:

As a follow up to this, the client states that these 2 individuals do not receive income from the company, only profit distributions. They said they had made it clear when they set up the plan. I was not aware of this at all. This is an S-Corp.

No wages, no plan contributions.

You should be careful to be very precise in discussing this topic with clients, advisors, CPAs and prospects.  If S-corp shareholders received "profit distributions", then they did receive "income" from the corporation.  What they apparently did not receive from the corporation were "wages" for employment.   Wages are the basis of plan compensation.  Using imprecise language like "income" leads to these situations.   I get proposal requests all the time, telling me a prospect has tons of "income".  But that income may or may not be plan compensation.  Usually a good chunk of it is in fact NOT plan compensation.  Sometimes it is gross revenue, sometimes it is their 1040 adjusted gross income, sometimes it is a WAG.  I always ask for the entity type and how it is electing to be taxed.  Then I can ask specific questions to get to a plan compensation figure to use. 

[Larry Starr]

4 hours ago, shERPA said:

No wages, no plan contributions.

You should be careful to be very precise in discussing this topic with clients, advisors, CPAs and prospects.  If S-corp shareholders received "profit distributions", then they did receive "income" from the corporation.  What they apparently did not receive from the corporation were "wages" for employment.   Wages are the basis of plan compensation.  Using imprecise language like "income" leads to these situations.   I get proposal requests all the time, telling me a prospect has tons of "income".  But that income may or may not be plan compensation.  Usually a good chunk of it is in fact NOT plan compensation.  Sometimes it is gross revenue, sometimes it is their 1040 adjusted gross income, sometimes it is a WAG.  I always ask for the entity type and how it is electing to be taxed.  Then I can ask specific questions to get to a plan compensation figure to use. 

AMEN!

[Larry Starr]

5 hours ago, coleboy said:

As a follow up to this, the client states that these 2 individuals do not receive income from the company, only profit distributions. They said they had made it clear when they set up the plan. I was not aware of this at all. This is an S-Corp.

How long ago was the plan set up? What has been done in prior years (assuming there are prior years)?

I don't know if you or your firm set up the plan (you don't say), but if you did, sorry, but the problem originates with whoever did set it up who apparently did not know what they were doing so they didn't discover the basic information needed to design the plan.  Were there prior years and did the partners get contributions in prior years?   Are there participants other than the partners?  

Depending on the answers to the above questions, they could be in a whole heap of trouble!

[coleboy]

My company set this plan up and it's noted in the plan document that it's an S-Corp.This is the 2nd year. I was not involved in the 1st year as I was out on disability. Last year those partners did get a profit share contribution based on an email from the client that the partners received distributions of a certain amount.. 

[shERPA]

2 hours ago, coleboy said:

My company set this plan up and it's noted in the plan document that it's an S-Corp.This is the 2nd year. I was not involved in the 1st year as I was out on disability. Last year those partners did get a profit share contribution based on an email from the client that the partners received distributions of a certain amount.. 

Well the good news this goes back just one year, so it can be self-corrected. The bad news is the shareholders (they are not partners if it is a corporation, again it’s important to use precise language) won’t like the fix, which is to reallocate the PS contribution based on the correct plan compensation of eligible participants. So if they truly don’t have any W-2 wages, they won’t share in the allocation.  

[Larry Starr]

7 hours ago, shERPA said:

Well the good news this goes back just one year, so it can be self-corrected. The bad news is the shareholders (they are not partners if it is a corporation, again it’s important to use precise language) won’t like the fix, which is to reallocate the PS contribution based on the correct plan compensation of eligible participants. So if they truly don’t have any W-2 wages, they won’t share in the allocation.  

Exactly.