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New Sole Proprietorship – solo 401k and spouse questions

Home Tax Reduction New Sole Proprietorship – solo 401k and spouse questions

  • Avatar drgenefish 
    Participant
    Status: Physician
    Posts: 3
    Joined: 08/09/2019

    My wife is starting a new business which will be a sole proprietorship. We are estimating she’ll be making in the $80,000 / year range for right now.

    We don’t need any of her salary for living and we are (I feel) a little bit behind on retirement savings. So we are looking to maximize what she puts into retirement. I am going to help her with the admin side of the business – but not exceed 500 hours or play a huge role.

    I also own a business (S-Corp) where I contribute $13,000 to my SIMPLE IRA. I am thinking a reasonable salary for me will be about $1,000 per month.

    Questions:

    1) for me as the spouse to get paid from the business, do we need to do that with a W2? Would that be easiest just through a payroll company?

    2) Then if I contributed $6,000 to the Solo 401k, how much could my wife’s company contribute?

    3) If my wife contributes $19,000, again how much could the business contribute? Are we better off making her contribution lower and the business higher?

    4) Is the business contribution to both of our solo 401ks a business expense for the business? If so how do we figure out how much can be contribute? My head isn’t understanding this no matter how many times I look at it.

     

    Thank you!!!

    #244565 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8113
    Joined: 01/09/2016
    1. Yes, you would need a W2 unless you do this for other businesses.
      • How about a QJV (Qualified Joint Venture) instead? You could own, say 15% to her 85%
    2. 25% of your W2 pay (20% of your share of profits less 1/2 FICA tax if a QJV)
    3. 20% of the business’s net profit less 1/2 of FICA tax
    4. Yes, answered how much in #2 and #3

    You didn’t ask, but why do you have a SIMPLE IRA for your business if you are behind in retirement savings? If it is because you have other employees, then you will not qualify for to contribute to a solo-k in your wife’s business. I’m not even sure if your wife will. If you’re the sole owner, however, what’s wrong with your own solo-k?

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #244574 Reply
    Liked by spiritrider
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2374
    Joined: 03/01/2018

    Does your S Corp business have employees besides you?

    These things get complex. Because of spouse attribution rules it is as if you and your spouse own both businesses.

    Which leads to Controlled Group issues that get messy when there are employees involved.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #244575 Reply
    Avatar drgenefish 
    Participant
    Status: Physician
    Posts: 3
    Joined: 08/09/2019

    I have other employees in my S-Corp. I use the SIMPLE as a benefit to them and max it out myself. My wife is also an employee of my S-Corp. She also maxes her SIMPLE.

    I was told by Vanguard she could contribute up to $19,000 total across 401k and SIMPLE. So I assumed the same for me and her and the solo 401k.

    (next year I’ll take her off the SIMPLE IRA).

    – What would be the benefit of a Qualified Joint Venture? Would I need to then do 15% of the work?

    thank you for your help!

    #244825 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2374
    Joined: 03/01/2018

    Here’s the issue. Your S Corp and spouses Sole Prop are a Controlled Group. Because of family attribution ownership rules, it is as if both you and spouse own both businesses. Therefore, all employees within the Controlled Group should receive the same retirement benefit.

    In other words, if your spouse starts a 401k for the Sole Prop, the employees of the S Corp would be required to be covered by the solo 401k and receive benefits to pass non discrimination testing.

    You should consult a competent professional to review the situation. Perhaps a 401k profit sharing plan for your S Corp would make sense.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #244854 Reply
    Liked by jfoxcpacfp, Peds
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2374
    Joined: 03/01/2018

    Read this thread. A situation quite similar to yours, potentially.

    Establishing mega back door roth

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #244855 Reply
    Avatar drgenefish 
    Participant
    Status: Physician
    Posts: 3
    Joined: 08/09/2019
    Earnest refinancing bonus

    wow thank you!

    Looks like you have potentially helped me avoid a big mess.

    Yeah looks like moving from a SIMPLE to a 401k at my S-Corp and maxing out what we can there is the best move. Then use the remaining plus her income to live / invest in non-retirement.

    – Is there a preferred group to administer 401k plans around here?

    – Is there even any reason to set up a EIN and business bank account for my wife? (I’m thinking just a separate personal checking account with a debit card that she uses only for business is enough to keep track of everything.)

    #244862 Reply

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