K-1 Compensation For An S-Corp

Good morning, I have a potential new client where all of the employees (owners and non-owners) are paid via a K-1 (or so I've been told).  A few questions:

1. Can this be included as income for a retirement plan?
2. If yes, I assume the fact that it's a K-1 income doesn't change that all employees would have to be included (someone is making the argument that since it's K-1, we could set up a plan just for the owners.  I disagree, but I wanted to confirm)

Thanks everyone!

Only an S-corp shareholder (i.e., an owner) receives a K-1. The K-1 reflects the pass-through income from the S-corp to the shareholder. This is essentially investment income and can not be used for plan compensation.

An S-corp shareholder who is also an employee of the S-corp must receive a W-2. The W-2 compensation is the compensation that's usable for a plan.

51 minutes ago, C. B. Zeller said:

Only an S-corp shareholder (i.e., an owner) receives a K-1. The K-1 reflects the pass-through income from the S-corp to the shareholder. This is essentially investment income and can not be used for plan compensation.

An S-corp shareholder who is also an employee of the S-corp must receive a W-2. The W-2 compensation is the compensation that's usable for a plan.

Just as a followup, the thinking now is that the partner is being paid via 1099.  Is it an issue to then have the partner create his own S-Corp and have his own solo plan, using the income that was paid to him via 1099?

Sorry for all the questions, just not a scenario I'm familiar with.

32 minutes ago, metsfan026 said:

Just as a followup, the thinking now is that the partner is being paid via 1099.  Is it an issue to then have the partner create his own S-Corp and have his own solo plan, using the income that was paid to him via 1099?

Sorry for all the questions, just not a scenario I'm familiar with.

Whomever is giving you this "thinking" doesn't need to be advising on the technical side of retirement plans.

Partners get K1s, independent contractors get 1099s, but that doesn't mean the entity(ies)/employer(s) are going it right.

Who is (are) the employer(s), what is the tax structure, who are the owners, do they have earned income or compensation from the employer and who are the employees? If you have multiple employers, what is the relationship between them? Answer those questions and then you can determine the retirement plan options.

And if the income reporting does not properly match the corporate tax structure, you inform them thusly and if they have no interest in proper accounting you punt, not worth the headache IMHO.

23 minutes ago, CuseFan said:

Partners get K1s, independent contractors get 1099s

...and Employees get W2's.

exactly