S-Corp AND 401K

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EMDW
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Joined: Thu Jul 04, 2013 11:18 am

S-Corp AND 401K

Post by EMDW » Wed Feb 25, 2015 3:19 pm

Thank you for your help in advance.

I'm an owner of a small business with 4 employees. It is structured as an LLC but taxed as a sole proprietor. My new accountant is suggesting that I be taxed as a S-corp for 2015 to save more in taxes; this means I will require a W2 (biweekly pay) just like my employees. We have a non-elective safe harbor (3%) 401 K plan with profit sharing. According to the link below, am I now considered a highly compensated employee who must receive at least $120,000 yearly on the W2 income to qualify for the annual defined contribution limit of $53,000 (elective deferrals + safe harbor 3% + profit sharing)? The real question is how much do I pay myself yearly on the S-corp for 2015?

Previously the annual compensation for 2014 was stated as: 100% owner, no W-2, Schedule C income is over $260,000.00, works over 2,080.00 hours in a year, the 3% safe harbor contribution has been deducted from the income, over $260,000.00 in income in 2014. Per link below:

http://www.401khelpcenter.com/2015_401k ... O4qoPnF-FU

401k Plan Limits for Year 2015
401k Elective Deferrals $18,000
Annual Defined Contribution Limit $53,000
Annual Compensation Limit $265,000
Catch-Up Contribution Limit $6,000
Highly Compensated Employees $120,000

Spirit Rider
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Re: S-Corp AND 401K

Post by Spirit Rider » Wed Feb 25, 2015 5:51 pm

You misunderstand the application of the HCE $120,000 limit. Any employee with compensation of $120,000 is classified as an HCE. You as a 100% owner are classified as an HCE regardless of your income.

The HCE limit has no control over your W2 compensation. Your W2 compensation is something you and your accountant establish in accordance with IRS reasonable compensation guidelines. This is a particularly hot button issue with the IRS, because they know S-Corp owners are using unreasonably low W2 compensation to avoid payroll taxes.

Without knowing your particular circumstances, probably $100k of the $260K net business profits could reasonably be allocated at compensation. Coincidentally, $120K might be more defensible, because it is just over the SS Max wage base of $118,500. Of course, at that point you have minimized the payroll tax benefit of a S-Corp.

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LadyGeek
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Re: S-Corp AND 401K

Post by LadyGeek » Wed Feb 25, 2015 9:07 pm

This thread is now in the Personal Finance (Not Investing) (business structure, retirement plans).

While focused on benefit plans, the wiki might shed some light: Highly compensated employee

Also be aware of the differences between Highly compensated and key employees.

Here's the IRS source of your website reference: COLA Increases for Dollar Limitations on Benefits and Contributions
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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