K1 Income and Profit Share

[Bill Henderson]

Trying to figure out if K1 Income can be used towards a Profit Sharing Contributions?  We have a two partner 401k who pay themselves meager salaries limiting how much PS they can receive.  Question is can we use K1 Income?  Hope it is not an obvious question as I could not seem to find any older threads.  Thanks in advance for any advice

[Jakyasar]

What kind of an entity is the plan sponsor, a partnership or an s-corp? 

[Catch22PGM]

Sounds like you have a s-corp so you (they) are stuck with W-2 income only.  Shareholder distributions from a s-corp are not compensation for plan purposes.

[Dan]

If the K-1 reports earned income and/or guaranteed payments, that is generally included as plan compensation.

[Jakyasar]

Still not clear if s-corp or partnership, big difference.

[BG5150]

2 hours ago, Dan said:

If the K-1 reports earned income and/or guaranteed payments, that is generally included as plan compensation.

Not if it's an S-Corp.  In such a setup, the partners (should) take some W2 income, taxed as ordinary income, and the rest is pass-through dividends taxed at the dividend rate.  That is reported on the K-1.  (That's my understanding of them)

Dividends are not includable in income for plan purposes.  Therefore only the W2 wages are used for S-Corps.

[Jakyasar]

In addition, if a partnership, the partners should not be getting any W-2's.

[BG5150]

20 hours ago, Jakyasar said:

In addition, if a partnership, the partners should not be getting any W-2's.

You would think that, but it does happen.  Some places run deferrals through payroll so they can get them to the record keeper electronically.

[Jakyasar]

Oh, seen it many times, they never listen, always warn them about the IRS audit issues but what do I know?