Profit Sharing Caps - LLC partnership vs S Corp

[Vilgan]

Hi All,

Last year, my business was a standard LLC. While the language talks about 25% of profit can be profit sharing, it ends up working out to roughly 20%. So 100k would be something ~20k that I would be able to put tax free into a 401k as profit sharing.

This year, we have elected S corp and will are drawing a salary. What I've read is that profit sharing is a true 25% of W2 wages. So if we take 100k in salary, we could then have 25k as our profit sharing %. This seems to be corroborated by the Fidelity contribution calculator here: https://scs.fidelity.com/products/mobile/sepMobile.shtml

Is this correct? For some reason my google fu is failing me and I'm having trouble finding a solid confirmation of my understanding.

Thanks for any help on this!

[SeattleCPA]

Your math is correct. If you make $100K and pay that out entirely as wages, your S corp will be able to do a 25% match on $100K or $25K.

Note that this means you'll also get a K-1 from the S corp that shows a $25,000 loss. (The loss coming essentially from the $25K SEP contribution.)

For what it's worth, you're probably not saving money by jacking your salary so you can jack your pension. That 15.3% payroll tax "load" you pay is just too costly. Better to use a smaller salary if that's reasonable and accept a smaller pension.

E.g., if you pay yourself $40K and do 25% of the $40K so a $10K SEP match, you do short yourself that other $15K of potential SEP contribution.

But you'll be saving paying roughly $9K in extra payroll taxes.

Obviously, you need to be careful about the salary you set. It needs to be reasonable. The Bureau of Labor Statistics website can help you there. And we've got a table of approximate average S corporation salaries for around seventy industry categories here:

http://www.scorporationsexplained.com/average-s-corporation-salaries.htm

P.S. One other thought: Health insurance probably counts as wages if you do the bookkeeping right. E.g., if you pay yourself a $40K base but then also provide $10K of health insurance, you only pay payroll taxes on the $40K but you make the 25% contribution on the sum of the $40K and the $10K... so $12,500.

[Vilgan]

Great info, thanks!

[Laserjet3051]

Your math is correct. If you make $100K and pay that out entirely as wages, your S corp will be able to do a 25% match on $100K or $25K.

Note that this means you'll also get a K-1 from the S corp that shows a $25,000 loss. (The loss coming essentially from the $25K SEP contribution.)

For what it's worth, you're probably not saving money by jacking your salary so you can jack your pension. That 15.3% payroll tax "load" you pay is just too costly. Better to use a smaller salary if that's reasonable and accept a smaller pension.

E.g., if you pay yourself $40K and do 25% of the $40K so a $10K SEP match, you do short yourself that other $15K of potential SEP contribution.

But you'll be saving paying roughly $9K in extra payroll taxes.

Obviously, you need to be careful about the salary you set. It needs to be reasonable. The Bureau of Labor Statistics website can help you there. And we've got a table of approximate average S corporation salaries for around seventy industry categories here:

http://www.scorporationsexplained.com/average-s-corporation-salaries.htm

P.S. One other thought: Health insurance probably counts as wages if you do the bookkeeping right. E.g., if you pay yourself a $40K base but then also provide $10K of health insurance, you only pay payroll taxes on the $40K but you make the 25% contribution on the sum of the $40K and the $10K... so $12,500.

Thank you for the linked table on average s-corp salaries, have not seen this broken down by industry before; very helpful. MY CPA concurs that health insurance does count as part of wages/compensation in the calculation of max SEP contribution (we do the bookeeping "right."). This is my first year contrinuting to a SEP as an s-corp, so have been targeting the max contribution based on this definition of "wages." Hoping March/April filings support this presumption.

[Vilgan]

Slightly related question so felt bad about creating a new thread for it:

Do I owe any FICA taxes on the amount profit sharing amount? I could have sworn I paid self employment tax on it when we filed as a partnership last year but payroll processor showed no extra taxes due for the profit sharing contribution and I'm having trouble finding definite confirmation either way online.

Thanks!

[SeattleCPA]

Slightly related question so felt bad about creating a new thread for it:

Do I owe any FICA taxes on the amount profit sharing amount? I could have sworn I paid self employment tax on it when we filed as a partnership last year but payroll processor showed no extra taxes due for the profit sharing contribution and I'm having trouble finding definite confirmation either way online.

Thanks!

So that's a GREAT question... and you've discovered a hidden, often missed advantage of an S corporation. If you report your business income via a Schedule C or on a partnership return, things like the self-employed health insurance deduction and the profit-sharing part of a pension plan deduction get used for reducing your income taxes... but not your self-employment taxes.

If you do the accounting right and you report this stuff on an S corporation tax return, you reduce income taxes... AND employment taxes.

[AK]

I am a one-man S-Corp who has the biz pay for health insurance. My CPA mentioned that the premiums would not count as wages that could be included in the 25% calculation. However he mentioned they could still be deductible by claiming them as wages and following these procedures.

My healthcare premiums are about 10K annually so if there's something that I can do differently to allow that to be included in the employer contribution calculation, please let me know! I spent considerable time researching this months ago, even reading IRS publications, but there was no definitive, explicit answer. Perhaps, I should just ask the IRS?

[Laserjet3051]

I am a one-man S-Corp who has the biz pay for health insurance. My CPA mentioned that the premiums would not count as wages that could be included in the 25% calculation. However he mentioned they could still be deductible by claiming them as wages and following these procedures.

My healthcare premiums are about 10K annually so if there's something that I can do differently to allow that to be included in the employer contribution calculation, please let me know! I spent considerable time researching this months ago, even reading IRS publications, but there was no definitive, explicit answer. Perhaps, I should just ask the IRS?

This IRS publication states that the health insurance premium paid by the s-corp (for a more than 2% shareholder) DOES count as wages (and as such, can be computed as part of the 25% calculation).

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues

[SeattleCPA]

If you do the accounting right, health insurance counts as W-2 box 1 wages... but not as W-2 box 3 or box 5 wages... as long as you can take the health insurance amount as a deduction on your 1040, this means the health insurance isn't subject to either income or payroll taxes if you operate an as S corporation and you do the accounting right.

BTW, if you paid yourself $50K in "base wages" and then another $10K in health insurance (so W-2 box 1 shows $60K but boxes 3 and 5 on W-2 show as $50K), you would calculate your pension match using the box 1 amount...