Corporations and compensation
Corporations or LLCs with corporation elections are required to pay a reasonable compensation.
- An officer of a corporation who provides services to the corporation is generally considered as an employee of the corporation
The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.
https://www.irs.gov/pub/irs-news/fs-08-25.pdf
- As an officer of a corporation, you must be paid reasonable compensation
- Reasonable compensation is defined as “commensurate with your duties” and “the value that would ordinarily be paid for like services by a like enterprise under like circumstances” (from the IRS articles below)
- Reasonable compensation is subject to employment taxes
- Reasonable compensation must be processed via payroll on a W2
- Your W2 figure is the starting figure to calculate contributions from
- Pass-through income reported on Form 1120S (Schedule K-1) is not considered self-employment income and cannot be counted toward calculating contributions to the Solo 401k for those with a corporation
https://www.irs.gov/businesses/small-businesses-self-employed/paying-yourself#7