1/2% owner for key employee

[Guest Traci]

My question is regarding the 1 of 10 employees rule owning a 1/2 percent of the company making more than $30,000 per year. My manager is telling me to apply this rule all of the time and I have always been under the impression that you just apply this rule when you are dealing with a large company with a lot of owners. According to my manager anyone owning a 1/2 percent making $30000 would be considered key. But then what is the point of even having the 5% and 1% rule wouldn't those people already be key since they own a 1/2 percent?

[david rigby]

A 5% owner is Key no matter what the compensation. A 1% owner is Key if the comp exceeds $150,000 (not indexed).

[Guest Traci]

Say we have a company of 20 employees and 3 owners.

One owning 1% making $ 40,000

One owning 6% making $100,000 and

One owning 93% making $100,000

Would all three be considered key or just the 6% and 93% owners.

[Guest]

All 3 would be key employees. I believe that the purpose of the Top ten owner test is to ensure that the owners of smaller companies are considered key in spite of low compensation.

[R. Butler]

Your manager is correct. Definition of key employee is found in IRC 416. If an employee is one the 10 largest owners (provided ownership is at least 1/2%) having compensation in excess of the annual addition limit than they are key.