Does an S corporation shareholder need wages for retirement plan purposes?
A shareholder-employee in a subchapter S corporation must receive taxable wages to be eligible to have a contribution made on his or her behalf to the S corporation’s tax-favored retirement plan. In an S corporation, “pass-thru” income is never considered compensation for qualified plan contribution purposes. Similarly, a partner in a partnership may only use net-earnings from self-employment as the starting point for his or her retirement plan contribution. Thus, in a partnership where capital is a material income-producing factor, a portion of the partner’s share of ordinary income may not be earned income eligible for retirement plan contributions.
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