Qualified Joint Venture (QJV) questions

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misterno
Posts: 478
Joined: Sat Mar 08, 2014 7:55 am

Qualified Joint Venture (QJV) questions

Post by misterno » Thu Apr 26, 2018 10:46 am

I work 9/5 full time and I also have a side business at home. My wife always helped me with the business but I never thought of taking advantage of setting up Qualified Joint Venture for tax and 401k purposes until now.

Here are the facts

I am in Texas which is a community property state. I think it matters but I am not sure how

My income from 9/5 around 110K and I fully invest in 401k thru the employer which is 18,500 and a little on Traditional IRA (IRA income limits)
Wife is a sit home mom with no income and fully invest in Traditional IRA at 5,500. She invested in 2017 and 2018 as well.
Business (sole prop) gross income 84K net income 26K so I invest in SEP IRA around 6K. I wait until filing taxes so I only invested for 2017 not 2018.

Also, she does not need social security credits because she never worked before. She is already entitled to half of my soc sec check anyway so any contribution to social security will be wasted. But it can be justified with tax deferral savings if it makes sense.

Questions
1) Which one is better? Qualified Joint Venture (QJV) or hiring my wife and pay her salary.

If I pay her salary she can invest in solo 401k 18,500 plus the 20% of business profit (company contribution). What happens in QJV?

2) What are the advantages of QJV? Can I have one now which is in the middle of the year?

3) Do I have to convert into LLC to have QJV? (I think I don't have to since I am in a community property state but I am not sure)

4) If we do QJV, can my wife invest in solo 401k 18,500? How about the company contribution?

5) If my goal is to maximize tax deferred savings which way is the best for me assuming gross and net income will increase much more in the coming years?
Last edited by misterno on Fri Apr 27, 2018 10:06 am, edited 1 time in total.

misterno
Posts: 478
Joined: Sat Mar 08, 2014 7:55 am

Re: Qualified Joint Venture (QJV) questions

Post by misterno » Thu Apr 26, 2018 11:56 am

I would really appreciate if someone can chime on this

Thanks

Spirit Rider
Posts: 8918
Joined: Fri Mar 02, 2007 2:39 pm

Re: Qualified Joint Venture (QJV) questions

Post by Spirit Rider » Fri Apr 27, 2018 3:09 pm

misterno wrote:
Thu Apr 26, 2018 10:46 am
Questions
1) Which one is better? Qualified Joint Venture (QJV) or hiring my wife and pay her salary. If I pay her salary she can invest in solo 401k 18,500 plus the 20% of business profit (company contribution). What happens in QJV?
I almost always suggest a QJV for the flexibility and simplicity. Usually when you have flexibility, you also have complexity. In this case the opposite is true. Paying her as a W-2 employee has all of the restrictions and complexity.

As a W-2 employee she must be paid a Fair Market Value (FMV) wage for the number of hours worked to reach the compensation necessary. To make a 401k employee elective deferral of $18.5K she would need minimum wages of ~= $20,032.50, with the employee share of FICA ~= $1,532.50 deducted. You would need a minimum business profit ex-payroll costs of $20,032.50 W-2 wages + $1,532.50 employer share of FICA + $420 FUTA/SUTA = $21,985. This would leave ~= $4k business profit for you.

To make the full 401k employer contribution (25% of W-2 wages) she would need $18,500 / 0.75 ~= $24,667, because even though the 401k employer contribution is made by the employer. Annual additions: employee + employer contributions can not be > 100% of compensation. You would need a minimum business profit ex-payroll costs and employer contributions of $24,667 W-2 wages + $1,887 employer share of FICA + $420 FUTA/SUTA + $6,167 401k employer contribution = $33,141. This would be ~= $7K more business profit than you have.

To make the minimum $20,032.50 W-2 wages, she would need something like 52 weeks * 20 hours/week = 1,040 hours * $20/hour = $20,800. To make the minimum $24,667 W-2 wages, she would need something like 52 weeks * 24 hours/week = 1,248 hours * $20/hour = $24,960.
2) What are the advantages of QJV? Can I have one now which is in the middle of the year?
In a QJV each spouse must "materially participate" in the activity to be allocated a portion of the sole proprietorship's income and expenses it is the results of their respective Form 1040 Schedule and SE that gives the the net self-employment earnings to be able to make employer retirement plan contributions. See IRS Publication 925 Passive Activity and At-Risk Rules, , page 5, "Material Participation". The easiest rule to meet is "1. You participated in the activity for more than 500 hours." You will note that this is far less hours required than my example and there is no require to attach FMV to the amount of wages. In fact, you do not have to allocate the QJV interest 50:50.

Once you both have met the minimum participation standards, you can choose any allocation within reason. For example, you could allocate the income and expenses of net 26K as $20K your spouse and $6K yourself. You wife's SE tax = $20,000 * 0.9235 = $18,470 * 15.3% ~= $2,826. Her net self-employment earnings (business profit - 1/2 SE tax) = $20,000 - $1,413 = $18,587. She would be able to make a 401k employee elective contribution of $18,500.

Note: Even though the maximum employer contribution = net self-employment earnings * 20% ~= $3,717. It is further limited to (net self-employment earnings - employee elective contribution) / 2, $18,587 - $18,500 = $87 / 2 = $43.50. Also, since all employees including spouses must receive the same % non-elective employer contribution. Your employer contribution % = $43.50 / $15,587 < 0.3%. Note2: This same effect would happen with her as a W-2 employee, because of the annual addition 100% of compensation limit.

Note3: You have until your tax filing deadline including extensions to file your tax returns. See the Schedule C instructions on QJV. You elect QJV status by simply filing your tax return with you each filing a Schedule C/SE on the allocated businesses income/expenses. You also have the same filing deadlines for making one-participant 401k employee elective contributions and employer contributions.

Note4: If your wife is a W-2 employee, her employee elective contributions must be deducted from compensation not already received with a pay date on or before 12/31 and timely deposited.
3) Do I have to convert into LLC to have QJV? (I think I don't have to since I am in a community property state but I am not sure)
No, there is no requirement to be an LLC in any state. In fact, you can not have a QJV if you are in a non-community state and have an LLC.
4) If we do QJV, can my wife invest in solo 401k 18,500? How about the company contribution?
The answer is yes to both, given sufficient allocated net self-employment earnings. The limitation on employer contributions is true in all one-participant 401k plans when the business profit < the (employee elective contribution / 0.6). In 2018 with a full $18.5K employee elective contribution this is $30,833. Note: This limitation only applies to the person making employee elective contributions, but until your wife clears this hurdle, your contributions are limited to the same contribution % as her.
5) If my goal is to maximize tax deferred savings which way is the best for me assuming gross and net income will increase much more in the coming years?
The maximum tax deferred savings will be roughly the same with the QJV having the slight advantage because complexity, payroll costs and FUTA/SUTA.

However, it does not make sense to allocate > the (employee elective contribution / 0.6) to you wife, if your W-2 wages + 0.9235 of your allocated net self-employed earnings are > the Social Security (SS) maximum wage base.

At that time your incremental SE tax will be 2.9% and hers will still be 15.3%. Since either of you at that time could receive the full 20% employer contribution, it is less expensive for you to take the earned income and employer contributions.
Last edited by Spirit Rider on Fri Apr 27, 2018 5:21 pm, edited 1 time in total.

scarabrad
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Re: Qualified Joint Venture (QJV) questions

Post by scarabrad » Fri Apr 27, 2018 4:03 pm

To clarify...if I live in Massachusetts, a non community property state, I cannot file a husband wife business as a QJV but must elect LLC status, correct?

SGM
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Joined: Wed Mar 23, 2011 4:46 am

Re: Qualified Joint Venture (QJV) questions

Post by SGM » Fri Apr 27, 2018 4:17 pm

We have not used a QJV. I did have an S-corp for my now retired medical practice and hired my spouse as a sole part-time employee for a few years. I was doing the work I hired her for initially myself. My main purpose in hiring her was to increase tax deferred space. All of her salary went into a combined 401k and profit sharing plan which was eventually converted to a Roth IRA. The small amount of additional SS payments will not make much difference when she takes her own SS at age 70. Currently she has a spousal benefit.

We have some income producing properties, but do not take a salary from them. Unfortunately I cannot help much when it comes to QJVs.

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Qualified Joint Venture (QJV) questions

Post by Spirit Rider » Fri Apr 27, 2018 5:28 pm

scarabrad wrote:
Fri Apr 27, 2018 4:03 pm
To clarify...if I live in Massachusetts, a non community property state, I cannot file a husband wife business as a QJV but must elect LLC status, correct?
Sorry, I had a total brain fade and did not finish the sentence. I edited my previous reply.

"No, there is no requirement to be an LLC in any state. In fact, you can not have a QJV if you are in a non-community state and have an LLC."

The basis rule is that you can not elect QJV status if you also have an LLC, unless you live in a community property state. In other words it doesn't matter whether you have an LLC in a community property state. Everywhere else it does.

You are perfectly fine to elect a QJV in Massachusetts as long as you don't have an LLC. Does that clarify it?

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