K-1 plus W2 for compensation for SEP IRA?

Forum|Forum|6 years ago
August 19, 2019
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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

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

Level 15

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.

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.