K-1 plus W2 for compensation for SEP IRA?

Forum|Forum|6 years ago
August 19, 2019
1 reply
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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.

Best answer by dmertz

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.)

dmertz

Level 15

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).

jross1801Author

Level 2

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

Level 15

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.