Compensation used to determine IRA contribution

[sali]

I have a client who has an LLC, but chose to be treated as an S Corp for tax purposes. Her wages from the company totaled $5,400 and the K-1 showed ordinary business income of $8,000. She is over 50 and is married. Husband is over 50. Can she use the $8,000 as compensation, add that to the $5,400 in wages and contribute a total of $13,000 to both her and her husband's Roth in 2013? Just found out about this. She is on extension. Everything I read says S Corp income from a K-1 is not included in the compensation figure and the software I use is calculating excess contributions when I key in the $13,000 ($6,500 for each taxpayer).

[Nashville]

Earned Income

Earned Income is the base for allowable contributions to IRA. Since ordinary income from S corp is not considered earned income, that's where you are running into trouble. I've checked as to whether you can define some of the more obscure K-1 lines (up to line 17) and can't find anything that would bring relief.

There ARE solutions, but would involve a possible 1099-MISC for more of the corporation's income, and result in more self-employment tax to the owner.

I just joined in, but certainly not of expert knowledge. Maybe others can help.

[Lion]

From your explanation, W-2 income and not K-1 income.

Also, wasn't the deadline for Roth and Traditional IRA contributions 15 April?

If she already made excess contributions, have her get the plan administrator/broker/bank to take them out INCLUDING earnings; OR if made during 2014 for 2013, change to 2014 contributions and remember to not go over during the rest of 2014.

[JohnH]

That's correct. The window for 2013 Roth IRA and/or traditional IRA contributions slammed shut on 4/15/14. Her only choice at this point is $1,350 in to a SEP for herself, which must be done by the corp by 9/15/14. Nothing can be done for the husband.

[sali]

I suspected that. She did make the contribution by the due date of 4/15/14 for 2013 and is on extension. Another problem associated with this entire thing is that for past years (I know at least back as far as 2010) she has been contributing the maximum to Roths for both herself and her husband and has had the same W-2 income and approximately the same S Corp 1099 income of $5,400 and $8,000 respectively for those years. The previous preparer told her that in the past the tax laws allowed for S Corp income to count toward earned income. Does anyone know if in the past there were tax law changes like this and when? Also, how do I correct past year excess contributions? I think I can file form 5329 by itself for prior years. Is there any relief from penalties for bad advice? Thanks.

[JohnH]

The prior preparer was wrong.
Nothing significant has changed with respect to this issue.
I'll bet the prior preparer didn't put anything in writing, although incorrect preparation of the tax returns might count for something.

[DaveO]

Does the husband have seperate W-2 income that would allow them to contribute? If not I can't see how they survive if she banks all the income her S-Corp earns. If hubby has sufficient W-2 income then they can max the ROTH out.

[TaxGuyBill]

Another problem associated with this entire thing is that for past years (I know at least back as far as 2010) she has been contributing the maximum to Roths for both herself and her husband and has had the same W-2 income and approximately the same S Corp 1099 income of $5,400 and $8,000 respectively for those years.

You mean K-1 income, not 1099 income, right?

[sali]

Yes I meant the same K-1 income.

[sali]

Husband has no W-2 income. They live off investment income.