Several 401K plans I have seen allow owners of a business that generates a Schedule K-1 to contribute to 401K based on "total compensation" which they define as W-2 earnings plus Schedule K-1 earnings. Would this be allowed for an S-Corporation? One source I found suggests it would only be allowed for a partnership.
401K Contribution on Total Compensation Including Schedule K-1 Income
Jan 19, 2010
1 Replies
NO - and that's because K-1s from a partnership are inherently different than K-1s from an S Corp.
In a TRUE partnership, the general partner's share of income from operations is almost always considered self employment income. As such it qualifies as earned income. Retirement plan contributions all focus on earned income.
On the other hand, an S corporation distributes income from operations but it is NOT considered earned income. This is because in an S Corp to get earned income you have to take a salary.
Keep this in mind - When calculating how much you can put into a retirement account you start with the same number on which you paid employment taxes.
Gene E. Utterback, EA, RFC, ABA
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