Compensation For An S-Corp

[metsfan026]

I have a client who is an S-Corp.  They get a W2, but also took what the call $70k in "distributions" as bonuses that are not included in their W2 for the year.

The question is, do those "distributions" count towards compensation during the year or is it excluded since it is not part of the W2?

[Bri]

Aren't those essentially dividends paid to the shareholder of the S-corporation?  (And thus, not wage income - and taxed at a different rate, too)

[Belgarath]

I agree with Bri. These "pass through" distributions aren't eligible for plan purposes.

There was a court case way back, (Durando) that ruled an S-corporation owner could not have a plan as a self employed. Therefore, W-2 as a common law employee is what is used. Also, I'm quite sure the IRS has publicly taken this approach, although I couldn't give you a specific citation or reference.

[Dare Johnson]

S-corp dividends are considered a return on investment and not subject to FICA/Medicare tax, so would be excluded from retirement plan compensation.

Here is the link from the IRS Retirement Plans FAQ:

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