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401-K and REASONABLE COMP FOR S-CORP

HOPE2
Level 8

Hi to all.

As you know S-Corp issues reasonable comp, W-2 for shareholder and this amount is equal box1 on W-2. For my client Reasonable Comp is $85000 (RCReport)

My question is: Shareholder wants to contribute on 401-K for $8000 so in this case box 1 is less than box3&5. When I want to fill out page 1 of S-Corp in part reasonable compensation and then Sch E what amount is going to be there? Box1 or Box3&5.

Any help would be greatly appreciated it.

 

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9 Comments 9
Jim-from-Ohio
Level 10

someone else can chime in but from a general journal entry (assuming a single payroll for the entire year to make the example simple).. 

  • Debit Wage Expense $ 93,000
  • Credit 401K Withheld 8,000
  • Credit Federal withheld, FICA withheld state, withheld, etc for whatever they are
  • Credit cash for the Net

The trial balance, (and Income statement) will show a balance of $ 93,000 (pretend only one employee) so I think the amount to be shown for sharehold wages is 93,000

 

 

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sjrcpa
Level 15

I'm reading the numbers differently than Jim, but compensation on page 1 of the 1120S is wages before the 401(k) deferral.


Ex-AllStar
HOPE2
Level 8

Jim thanks, but fringe benefits and retirement all included in reasonable compensation and employee's contribution has no effect on S-Corp's journal entry; only S-Corp contribution does have.

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BobKamman
Level 15

The instructions for Line 8 of the 1120-S state:

Don't include salaries and wages reported elsewhere on the
return, such as amounts included in cost of goods sold, elective
contributions to a section 401(k) cash or deferred arrangement,
or amounts contributed under a salary reduction SEP agreement
or a SIMPLE IRA plan.

But then for Line 17:

Enter the deductible contributions not claimed elsewhere on the
return made by the corporation for its employees under a
qualified pension, profit-sharing, annuity, or simplified employee
pension (SEP) or SIMPLE IRA plan, or any other deferred
compensation plan.

The way I read this is that if the $8,000 (from your example) comes out of the employee's wages, you include it on Line 8, which would show the FICA (or higher Medicare) wages from the W-2.  But if the company then "matches" this with another $8,000, that would go on Line 17.  

 

HOPE2
Level 8

Thanks Bobkamman. But my question is about line 7 for shareholder employee. Line 8 is about other employees.

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Taxtime3
Level 3

To sj and Jim's point, gross wages are the expense.

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BobKamman
Level 15

The instructions I quoted are for both Lines 7 and 8.  IRS doesn't make it clear whether that paragraph applies to both, or one or the other.  

qbteachmt
Level 15

"Shareholder wants to contribute on 401-K for $8000"

Is this for 2023 planning or for 2022 filing? For S Corp or personal? It's a bit late for 2022. Or, this is that same client you are catching up for 2022 payroll?

"and then Sch E what amount is going to be there? Box1 or Box3&5."

Sched E for 1040 or for 1120S? I'm curious for what part a 401(k) plays with which Sched E for that employment. I don't think I've ever been asked to link the data.

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HOPE2
Level 8

Hi qbteachmt. Thanks, but my title says S-Corp, form 1125-E  for shareholder compensation in S-Corp in line 7 I meant that I forgot to mention 1125-E instead SCH E sorry. Yes; it is late for 401-K, I know.

My question is: when an employee contribute to 401-k for example $8000, on W-2 box1 and box 3 are different, box 1 is lesser. On the S-Corp side, what number goes on line 7 or form 1125-E. If number box 1 goes in there it is lesser than the reasonable comp which considered for shareholder employee for $80000.

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