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Author: cslob One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121482  
Subject: S Corp: are owners "self employed" Date: 10/13/2006 1:44 AM
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I am part owner of an S Corporation who is my employer (i.e. a shareholder).

Why does the IRS consider me 'self-employed' ? Just because they do?

The reason I ask is related to our SEP IRA plan ( Under SEP, all employess must get the same percentage contribution, part owner or not.) It complicates accounting and obfuscates the tax situation because the contributions to non-owners are a normal business expense (employee benefit) but contributions to owners are not, and appear as profits of the corp that fall thru to owner's personal taxes where a "Self-employed SEP Deduction" is taken personally. Follow that?

This all comes out tax neutral, but it still shows that the company has made (and still has) money that in fact was spent on a legitimate purpose. In fact we try to spend much of (what would have been) profit into the SEP.

I know, ask my accountant--but you see I've just told you what I think he said--and it doesn't make any sense!

When I go to a bank for a mortgage, they don't think I'm self employed. I have a salary, benefits, seniority, a W2, etc and very little say about how the business is run.

Can anybody shed light on this? Do I have something wrong?
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Author: acm4tax Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 89103 of 121482
Subject: Re: S Corp: are owners "self employed" Date: 10/13/2006 3:24 AM
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The reason I ask is related to our SEP IRA plan ( Under SEP, all employess must get the same percentage contribution, part owner or not.) It complicates accounting and obfuscates the tax situation because the contributions to non-owners are a normal business expense (employee benefit) but contributions to owners are not, and appear as profits of the corp that fall thru to owner's personal taxes where a "Self-employed SEP Deduction" is taken personally. Follow that?

This all comes out tax neutral, but it still shows that the company has made (and still has) money that in fact was spent on a legitimate purpose. In fact we try to spend much of (what would have been) profit into the SEP.

I know, ask my accountant--but you see I've just told you what I think he said--and it doesn't make any sense!

When I go to a bank for a mortgage, they don't think I'm self employed. I have a salary, benefits, seniority, a W2, etc and very little say about how the business is run.

Can anybody shed light on this? Do I have something wrong?


Sounds right to me.

You are limited to the amount you can put into your SEP-IRA based on your wages, not your share of the earnings of the S corp. So the more than 2%, (or is it 5%) shareholders show their SEP contributions on the front page of their personal 1040 returns. If the return is done on a computerized tax program, your W-2 wages are entered into a worksheet and the amount of the maximum amount of your allowed contribution is calculated. So if you over contributed, your limited amount will be shown on your tax return, (line 28 on your 2005 tax return.) Then any over contribution will have to be withdrawn or a penalty will be due.

Your % of the profits of the company appear to be higher than they should be on Sch E, but then it's reduced by the amount of the SEP IRA contribution on page 1 of your 1040, line 28. So as you say, it's revenue neutral.

I show the contributions paid by the company as a distribution of profits in the equity section of the Balance Sheet. The contributions made on behalf on the shareholders are not an expense of the corporation. The purpose of this is to allocate the contributions paid on behalf of the shareholders separately from the shareholders' allocation of the the profits of the S corp.

Unless you've exceed the allowed %, there's no problem.

BTW the profits of the company do not necessarily equal what's left in the bank account. Lots of times the funds are used to pay off loans, for example. The principal amount of the repayment is not a business expense, only the interest paid is. The money may have been used to purchase equipment. Unless your accountant elects to use Sec 179, only a portion of the cost of your equipment is depreciated over a period of years. There are other examples of funds paid out that are part of cash flow, but that do not affect the profit and loss, just the bank account.

I'm not sure I explained it any better than your CPA, but if you're still confused, email me and I'll try another way to explain.

Arleen

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