SEP-IRA contribution from K-1 income?

Submitted by Eleonora Tomasello on Fri, 2020-04-24 02:47

A business partner receives 1099 income from the firm. He also gets a K-1. The firm does not have a company retirement plan. Can the business partner contribute K-1 income into a SEP-IRA and take a deduction?

If so, must the other partners do the same?

Thank you!



Submitted by William Tuttle on Fri, 2020-04-24 03:42

  1. IRS regulation, “The partnership is considered to be the employer of each of the partners. Thus, an individual partner is not an employer who may establish a qualified plan with respect to his services to the partnership.”
  2. Even if the partnership had an employer retirement plan. Only compensation (self-employed earned income) can be the basis for retirement contributions. K-1 distributive share of the partnership’s profits are not compenssation eligible to be the basis for retirment contributions.
  3. Generally it is a violation of IRS rules and regulations to pay a partner as either a W-2 employee or an independent contractor. You need to be paid self-employed earned income as a partner on a K-1.
  4. Even if it was ok you and the partnership would be part of an Affiliated Service Group.

Who does this partnership have a as a tax professional that does not know these very baisc issues?

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