Does solo 401k contribution count as a wage?

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masonstone
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Does solo 401k contribution count as a wage?

Post by masonstone » Tue Aug 06, 2019 10:51 am

I have a solo 401k for my S-corporation. My business makes about $1million per year. I pay myself a wage of $150K per year and the rest I get in distributions. If I want to maximize my solo 401k contribution ($56,000) should I deduct it from the wage, ie give myself a wage of $94k and give the rest as a 401k contribution by the business or should I keep the wage the same at $150k and contribute the $56k separately.

PS: I've asked my cpa this question and he said he'll get back to me on it

niceguy7376
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Re: Does solo 401k contribution count as a wage?

Post by niceguy7376 » Tue Aug 06, 2019 1:59 pm

Employee contribution of 19K from Salary.
Employer Match (max 56k - 19K = 37K) can come ONLY as 25% of your salary.
So you need to have salary of 37*4 = 148K to get 56K max into your Solo 401k.

niceguy7376
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Re: Does solo 401k contribution count as a wage?

Post by niceguy7376 » Tue Aug 06, 2019 2:01 pm

How old are you?
Did you look at Defined Benefits plan for such company income?

Topic Author
masonstone
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Re: Does solo 401k contribution count as a wage?

Post by masonstone » Tue Aug 06, 2019 2:13 pm

niceguy7376 wrote:
Tue Aug 06, 2019 2:01 pm
How old are you?
Did you look at Defined Benefits plan for such company income?
Hi,

Thanks for your input. I'm 36 so a little young to use Defined benefits plans.

fyre4ce
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Re: Does solo 401k contribution count as a wage?

Post by fyre4ce » Tue Aug 06, 2019 2:29 pm

I'm interpreting your question as: Is it better to contribute $19k elective deferral from your wages and $37k ($56k minus $19k) from the employer, or all $56k from the employer? Here are the differences I'm aware of:

-You can only contribute 25% of your wages as employer matching, so you'd need at least $148k ($37k / 25%) salary if using the elective deferral, and $224k ($56k / 25%) salary if not. You're not going to get $56k in the 401k with a $94k salary.
-Elective deferrals can be Roth or traditional/pre-tax, whereas employer contributions can only be pre-tax. If you expect your income to be that high for your whole career, I'd suggest having at least some Roth contributions.
-You only get one elective deferral per person, so if you have another job that also offers a 401k, you'd probably want to use the elective deferral on the other job, and do all employer contributions into your Solo 401k.

Another note: the salaries you're talking about ($94k, $150k, even $224k) are a really small percentage of your business income. I'd think twice about the IRS "reasonable salary" requirement - if you get audited and they make you increase your salary you'll owe a lot in taxes and penalties.

mhalley
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Re: Does solo 401k contribution count as a wage?

Post by mhalley » Tue Aug 06, 2019 2:55 pm

Financial Samurai had an article on how much to take as salary vs distribution here:
https://www.financialsamurai.com/whats- ... -an-audit/

and had this to say:
So long as they get their 15.3% tax on $132,900 worth of salary from you, the IRS should have nothing to complain about if you’re giving yourself a very high distribution amount. They’re just waiting patiently for you to start hiring more employees.

Topic Author
masonstone
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Re: Does solo 401k contribution count as a wage?

Post by masonstone » Tue Aug 06, 2019 3:28 pm

mhalley wrote:
Tue Aug 06, 2019 2:55 pm
Financial Samurai had an article on how much to take as salary vs distribution here:
https://www.financialsamurai.com/whats- ... -an-audit/

and had this to say:
So long as they get their 15.3% tax on $132,900 worth of salary from you, the IRS should have nothing to complain about if you’re giving yourself a very high distribution amount. They’re just waiting patiently for you to start hiring more employees.
I believe it also depends on what those doing the same thing you're doing are making. A good example is how much does it cost to hire an employee to do the same profession.

Spirit Rider
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Re: Does solo 401k contribution count as a wage?

Post by Spirit Rider » Tue Aug 06, 2019 7:17 pm

mhalley wrote:
Tue Aug 06, 2019 2:55 pm
Financial Samurai had an article on how much to take as salary vs distribution here:
https://www.financialsamurai.com/whats- ... -an-audit/

and had this to say:
So long as they get their 15.3% tax on $132,900 worth of salary from you, the IRS should have nothing to complain about if you’re giving yourself a very high distribution amount. They’re just waiting patiently for you to start hiring more employees.
Hogwash! I have found many errors and would not trust any of the content on the Financial Samurai web site. This is nothing but wild speculation with no basis in fact.

There have been several court decisions over the last decade on what constitutes "reasonable" compensation. They fully support the guidance issued by the IRS in Fact Sheet FS-2008-25. In every court decision, they primarily focused on what another business in your COL area would pay someone with your knowledge, skills and experience for the same tasks. The Social Security maximum wage base is irrelevant to setting reasonable compensation.

Topic Author
masonstone
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Joined: Thu Feb 01, 2018 4:01 pm

Re: Does solo 401k contribution count as a wage?

Post by masonstone » Wed Aug 07, 2019 11:50 am

Spirit Rider wrote:
Tue Aug 06, 2019 7:17 pm
mhalley wrote:
Tue Aug 06, 2019 2:55 pm
Financial Samurai had an article on how much to take as salary vs distribution here:
https://www.financialsamurai.com/whats- ... -an-audit/

and had this to say:
So long as they get their 15.3% tax on $132,900 worth of salary from you, the IRS should have nothing to complain about if you’re giving yourself a very high distribution amount. They’re just waiting patiently for you to start hiring more employees.
Hogwash! I have found many errors and would not trust any of the content on the Financial Samurai web site. This is nothing but wild speculation with no basis in fact.

There have been several court decisions over the last decade on what constitutes "reasonable" compensation. They fully support the guidance issued by the IRS in Fact Sheet FS-2008-25. In every court decision, they primarily focused on what another business in your COL area would pay someone with your knowledge, skills and experience for the same tasks. The Social Security maximum wage base is irrelevant to setting reasonable compensation.
I think what Financial Samurai was saying that it raises less of a red flag if you pay the social security. I've heard that from others (including CPAs) as well. But if you're a physician subspecialist paying yourself $132,900 that probably won't fly with the IRS.

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