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Self employed 401k for wife’s small business

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  • Avatar Caligas 
    Participant
    Status: Physician
    Posts: 67
    Joined: 12/19/2017

    Wife is starting a side job selling her art. Currently has about $700-800 in sales for the year. Two questions:

    -is that income enough to go ahead and open the account? There is no IRS stated minimum. Expecting more as the year goes on. No guarantees.

    -am I correct that as a sole proprietor she can contribute an amount equal to her income from this business assuming it is well under the $18k max, (which it will be.)?

    Thanks!

    #189223 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1793
    Joined: 02/01/2016

    In the seminal SCOTUS ruling; to be considered a trade or business, the taxpayer must be engaging in considerable, regular, and continuous activity in a good faith effort to make a profit.

    I have always said that completing a few surveys as a one-off does not cut it. However, she is clearly operating a trade or business with several hundred dollar$ in profit. To me that is more than enough to adopt an employer retirement plan.

    She can contribute up to 100% of her earned income = net self-employment earnings (business profit – 1/2 SE tax) to a one-participant 401k.

    #189246 Reply
    Liked by Caligas
    Faithful Steward Faithful Steward 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 439
    Joined: 06/12/2017
    Wife is starting a side job selling her art. Currently has about $700-800 in sales for the year. Two questions: -is that income enough to go ahead and open the account? There is no IRS stated minimum. Expecting more as the year goes on. No guarantees.

    Click to expand…

    Is that $700-$800 in profit or revenue. She needs to be profitable on her Schedule C, in order to open a Solo 401(k).

    -am I correct that as a sole proprietor she can contribute an amount equal to her income from this business assuming it is well under the $18k max, (which it will be.)?

    Click to expand…

    Assuming she is a sole proprietorship, her salary deferral contribution is based on net adjusted business profit. Net adjusted business profit is calculated by taking gross self employment income and then subtracting business expenses and then 1/2 of the self-employment tax.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    https://ProsperousPhysician.com | (717) 496-0900

    #189275 Reply
    Avatar Caligas 
    Participant
    Status: Physician
    Posts: 67
    Joined: 12/19/2017

    It’s all profit, she is not claiming any deductions at this point, maybe in the future.

    She has a primary job teaching so I was not under the impression that she has to pay a self employment tax.

    #189299 Reply
    Avatar Caligas 
    Participant
    Status: Physician
    Posts: 67
    Joined: 12/19/2017

    Reading more about it. Looks like she will owe self employment tax on the profits. I guess I have till April 2020 to understand it it better.

    #189301 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2114
    Joined: 03/01/2018

    Reading more about it. Looks like she will owe self employment tax on the profits. I guess I have till April 2020 to understand it it better.

    Click to expand…

    she would have until tax filing deadline in 2020 to make contributions but the plan would need to be open by 12/31/19 to be able to make any 2019 contributions

    does she participate in any retirement plan in her primary job?

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

    #189340 Reply
    Avatar Caligas 
    Participant
    Status: Physician
    Posts: 67
    Joined: 12/19/2017

    Yes, nearly all of her (meager) teaching income goes to 401k.

    Did not mention, but the added benefit of this is that she can eventually move a rollover account into this solo 401k, thus making a “Backdoor Roth” viable.

    #189455 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1793
    Joined: 02/01/2016

    The reason for @jacoavlu‘s question is that her 2019 one-participant 401k employee elective contributions cannot exceed $19K – her other 401k employee elective contributions.

    Any employer contributions would be limited to the lesser of 20% of net self-employment earnings or (net self-employment earnings – employee elective contributions) / 2.

    #189458 Reply
    Liked by Peds
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3997
    Joined: 01/08/2016
    Did not mention, but the added benefit of this is that she can eventually move a rollover account into this solo 401k, thus making a “Backdoor Roth” viable.

    Click to expand…

    she has a tIRA somewhere? why cant she move it to the current work 401k?

    #189460 Reply
    Avatar Caligas 
    Participant
    Status: Physician
    Posts: 67
    Joined: 12/19/2017

    She was told she could not roll into her current active account. I don’t want to fight that battle if this route is easy enough to do.

    Spiritrider, please clarify. Are you saying that the solo 401k benefits are limited by her contributing to her 401k at her teaching job?

    At this point that is not a problem but something to watch if her side gig becomes more profitable.

    #189490 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2114
    Joined: 03/01/2018

    Everyone gets a single $19k elective contribution (salary deferral) limit that applies across all their 401k and 403b accounts. So your wife’s elective contribution limit may already be used up in her teacher 401k. The – in spiritriders comment is a “minus”

    If the elective contribution is already maxed out in her teacher 401k then she could still make an employer contribution to a solo 401k.

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

    #189495 Reply
    Liked by Caligas
    Avatar Caligas 
    Participant
    Status: Physician
    Posts: 67
    Joined: 12/19/2017

    Great info. Much appreciated!

    So that brings up another question. To justify opening the solo 401k, is it about having income from the side gig (we have established that she does with the $750 so far this year) or is it about actually contributing earned income to the solo 401k?

    Is it Bad to open the solo 401k then ONLY fund it with rollover money?

    #189514 Reply
    Avatar Caligas 
    Participant
    Status: Physician
    Posts: 67
    Joined: 12/19/2017

    I can always limit the teacher job 401k contributions to say, $18k, which leaves room to contribute something to the solo 401k.

    Honesty I don’t understand how most people navigate all this stuff.

    Thanks again.

    #189517 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1793
    Joined: 02/01/2016

    It is not mandatory to make employee or employer contributions in order to make rollover contributions, but it helps support the justification for adopting the one-participant 401k plan in the first place.

    However, there is no requirement in regards to order. Adopt the one-participany 401k, open your account, do your rollover and make the employer contribution next year when you file your taxes.

    Yes, in the bigger picture it is a trivial amount, but it is also a trivial amount of effort, so why not.

    #189520 Reply
    Liked by Caligas

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