K-1 vs W-2 for contribution

[thepensionmaven]

Three companies are owned by husband and wife, two s corps and an LLC.  One plan.  The owners get a W-2 in each company, also K-1s in the third company.

Irregardless of which entity sponsors the plan, K-1 income can not be used for pension purposes??

[Bill Presson]

They should be getting K-1s from the S Corps as well. Those aren't earned income and can't be used for pension purposes. If the LLC is taxed as a partnership, then the K-1 is (generally) treated as earned income, assuming they had an active role in the business. If the LLC is taxed as an S Corp, then the answer is the same as for the other S Corps. Maybe they chose not to pay themselves a salary and get a w-2 in the LLC.

You'll need to ask more questions.

[thepensionmaven]

Company that sponsors the plan is an LLC, taxed as a partnership.  The owners get W-2s in addition to K-1; they own two other companies where they just get W-2s.

Accountant now asking why the K-1 income was not included as compensation for the contribution calculation and is trying to tell me that guaranteed payments should be considered as "salary".

[Bill Presson]

As you've described it, the S Corps seem to have been done correctly. But if the LLC is taxed as a partnership, the partners should not have received w-2 compensation.

https://www.irs.gov/businesses/partnerships

From the IRS: "Partners are not employees and shouldn't be issued a Form W-2." So, the CPA did it wrong. With that said, you will need to count both amounts from the LLC. Depending on the K-1 amount, the calculation might get tricky.

[BG5150]

17 hours ago, thepensionmaven said:

Irregardless of which entity sponsors the plan, K-1 income can not be used for pension purposes??

Aaaaaaaaahhhhhhhhhh!

?????