@rvhatcher wrote:
Thanks, I understand now. But what's strange is that I had the same situation last year and it didn't trigger the warning. It's disappointing that the K1 which is income I earned in my little consulting company doesn't count.
If you have an S-corp, you must pay yourself a salary on a W-2 that represents fair compensation for the work you performed for the business, and it really should be equal to what you would have to pay someone else to manage the business or perform the same tasks. If the business has income that is more than the fair compensation for your own work, that flows to you on the K-1. (Passive income you earn off other people's work in the business, which is not the same as compensation for your own work.) It is illegal to set your compensation low for purposes of avoiding employment taxes.
You can only contribute to the IRA up to your compensation for work performed. You determined that your fair compensation for work performed was less than the amount you want to contribute to the IRA. It's your W-2 that controls, not some unfair IRS regulation. If your W-2 compensation is too low, you need to pay yourself a higher salary and pay the employment taxes that go with it. (W-2 compensation for S-corp owners is a leading audit issue, by the way.)
