K-1 plus W2 for compensation for SEP IRA?

[jross1801]

If 100% owner of an s-corp with $100k net income after expenses (including $50k salary to self), does that mean compensation is then $150k and that max SEP IRA contribution is 25% of that amount (so then $37,500)?

Thank you.

[dmertz]

No.  The $100k of income passed through on the Schedule K-1 (Form 1120S) is not compensation.  The contribution is based on the W-2-reported compensation.  With $50k of W-2 compensation and a SEP plan contribution rate of 25% (the maximum rate permissible), the S corp must contribute $12,500 to this individual's SEP-IRA.  The S corp takes the deduction for the $12,500 contribution on the S corp's tax return (Form 1120S).

[jross1801]

Oh wow.. I was led to believe it was the combination.  Would I be allowed to create any other IRAs for myself (e.g. a Traditional IRA with money I contribute to personally)?  Thanks again.

[dmertz]

For 2018, no, the deadline for a regular IRA contribution for 2018 has passed.  If you are asking about 2019, the W-2 income will support a regular personal IRA contribution.  With $50k in box 1 of the W-2, someone under age 70½ in 2019 can make a regular traditional IRA contribution, but with $150k of modified AGI it will not be deductible due to the individual being an active participant in a workplace retirement plan (the SEP plan); to avoid confusion, a regular traditional IRA contribution should be made to a different account than the SEP-IRA contribution.  $150k of modified AGI for the purpose of a Roth IRA contribution would prevent the individual from being eligible to contribute to a Roth IRA unless married filing jointly.

[jross1801]

Speaking to institutions, I have learned that the SEP max of 25% is W2 but also net income/profit taken in K1.  I.e. it is not just the W2.

[dmertz · Accepted solution]

That's bogus information from the institutions.  For the purpose of a retirement contribution the S corp owner is an employee of the S corp and is subject to the same contribution limit as any other employee of the S corp (if there were any) with that limit being 25% of W-2 wages only.  Income reported on Schedule K-1 (Form 1120S) is NOT compensation and is NOT to be included in the calculation of the SEP contribution.

See IRS Pub 560, page 5, where, with regard to compensation,  it explicitly states, "It doesn't include income passed through to shareholders of S corporations."

https://www.irs.gov/pub/irs-pdf/p560.pdf

(Perhaps the rep that gave you that bogus information misunderstood and thought that you Schedule K-1 reporting self-employment income from a partnership, not pass-through income from an S corp, or maybe the reps were just poorly trained.)

[jross1801]

Thank you for taking time for that reply.  Sounds like an Individual/Solo 401(k) is the better option for me then.  Any further comments welcome, of course.  I appreciate the advice.

[dmertz]

You'll always be able to contribute more to an individual 401(k) than to a SEP-IRA because employee elective deferrals are permitted to the 401(k) in addition to employer contribution.  Unless the SEP plan as a SARSEP established before 1997, SEP plans permit only the employer contribution.  The trade-off is that the individual 401(k) takes a bit more work to establish and manage and must be established before the end of the year for which you will be making contributions.  On the other hand, a SEP plan can be established anytime up until the due date of the tax return for the year for which the contribution is being made.