SEP Contribution controversy

Submitted by Maggie Benton on Thu, 2015-12-10 22:35

Greetings:

Scenario: LLC files 1120s and gives K1

Sole member takes $50K in wages on 1120s as compensation of officers
(There are 2 other employees but none that would qualify to participate in the SEP)

K1 shows $100k in income which flows through to his 1040 as distribution
1/2 of his self employment taxes were approx $3825

For 2015 SEP IRA Maximum contribution amount… is it his wages of 50,000 x.25 for $10,000

OR

(Per Beacon Capital) – Net adjusted self employment income is calculated by taking gross self employment income and then subtracting business expenses and then subtracting 1/2 of the self employment tax

(k1 income – 1/2 self employment taxes paid ) x .20
(100,000 – 3825) x .2 = $19,235

It’s a large difference and his tax advisor cant make head or tail either…



Submitted by Alan - IRA critic on Thu, 2015-12-10 23:27

Since he elected to be taxed as an S Corp, his SEP Contribution would be 25% of the W-2 salary paid. That comes to 12,500. The K 1 income is not included in the calculation. Does Beacon understand he received S Corp wages?

Submitted by David Mertz on Fri, 2015-12-11 00:05

  • A shareholder of an S corporation is an employee of the S corporation, not self-employed (except for the purposes of a self-employed health-insurance deduction).  The K-1 should not show any of this income as income from self-employment.  There isn’t even a place to report income from self-employment on a Schedule K-1 (Form 1120S).  The tax return should show no deduction for ½ of self-employment taxes.
  • Wages, federal tax withholding, Social Security and Medicare taxes are reported on a W-2, not a K-1.
  • Why didn’t the tax advisor recognize this as a problem with the K-1,  or as a problem with the way the individual’s tax-return preparer was reporting the distribution if the K-1 correctly did not indicate any of this as income from self-employment?

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