SEP contribution for 1099 commission income
If I receive 1099 commission income from a S corp which I am a 66% stockholder can I take a SEP deduction of 15% of the income on my 2016 individual tax return. I also receive substantial W2 income from the same corporation.
The problem is the S corp with employees does not have a pension plan. I am concerned the IRS could consider the 1099 income a distribution and disallow the SEP deduction.
My accountant says its not a good idea.
Are there other potential problems of taking the 1099 income & SEP deduction I am not aware of?
I am just trying to come up with a way to make a pension contribution. Its just too costly to have the S corp have a pension plan.
Thank you
Mike
Permalink Submitted by William Tuttle on Sat, 2017-03-04 22:19
The short answer is No, you cannot adopt an employer retirement plan and make a contribution on this income.The first problem is irregardless of the desire to make an employer retirement plan contribution, it is not proper for you as a 66% shareholder-employee to pay yourself compensation (commission income) on a 1099. This portion of the tax code is public poicy to provide retirement plans to employees and the employers themselves can also participate. There are many IRS regulations to prevent you from discriminating against your employees. How many employees do you have? There are fairly low cost safe harbor 401k plans with modest administrative costs, but you will have to make minimum employer contributions to allow you to make deferrals. Also, SIMPLE IRA plans have much lower administrative cost and the required employer contributions are somewhat lower.
Permalink Submitted by mike silvers on Sun, 2017-03-05 15:57
Thank you – If you had a reason to pay a commission in addition to wages could you then take a SEP on the commissions?Thanks again
Permalink Submitted by William Tuttle on Sun, 2017-03-05 17:17
These are still payments from the same business. You are trying siphon off revenue from the S-Corp to provide yourself with tax-advantaged retirement beenfits while discriminating against your employees. There are lots of IRS regulations including complex ones for Controlled Groups and Affiliated Service Groups that are specifically intended to prevent what you are trying to do. You are not a >= 80% owner, so you could start a totally unrelated business with revenue from unrelated sources and make contributions from that revenue, but if you want to make retirement plan contributions from any of the S-Corps revenue, you are going ot have to offer a plan that includes your employees.
Permalink Submitted by David Mertz on Sun, 2017-03-05 22:26
I don’t see how it is proper for the S corporation to report any of your income on a Form 1099-MISC. You are either an employee or you are an independent contractor. You can’t be both, unless perhaps you were an employee for some part of the year and an independent contractor (and not a shareholder) the other part of the year. Commission earned while you are an employee/shareholder belongs on your W-2.