Paying Wife in S-corp 401k max without Take-home

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duckfan101
Posts: 11
Joined: Wed Mar 28, 2018 1:42 pm

Paying Wife in S-corp 401k max without Take-home

Post by duckfan101 » Mon Apr 16, 2018 1:30 am

Setting up payroll with Gusto and trying to pay the wife 18,500. I am an S-corp (wife and self are the only employee's)

Payroll company suggests this the correct number to pay her so that she doesn't have any take home and all goes to solo 401k? It seems a bit high, but maybe I'm not naive to how this all works. I am not withholding any federal or state taxes from her paycheck either.

Employee Gross Pay
$24,039.00 per year

Employee Net Pay
$22,170.89 per year

Employer Cost
$26,574.12 per year
$2,223.03 per pay period

As always, thanks for the input. This forum has been incredibly helpful.

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

Re: Paying Wife in S-corp 401k max without Take-home

Post by Spirit Rider » Mon Apr 16, 2018 7:03 pm

I would ask them to itemize this. It looks like they are applying income tax withholding which would generally not apply unless these were Roth 401k contributions.

I get $20,032.50 - (20,032.50 * 7.65% ~= $1,532.50) = $18.5K.

Are you in NJ or somewhere that retirement plan contributions are taxed?

NYC_Guy
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Location: New York

Re: Paying Wife in S-corp 401k max without Take-home

Post by NYC_Guy » Mon Apr 16, 2018 7:09 pm

Assuming you also want to do the 25% profit share contribution, the ideal number is $24,667, but you will pay a bit more in FICA. This amount also has to be reasonable in relation to the work performed by her.

spammagnet
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Re: Paying Wife in S-corp 401k max without Take-home

Post by spammagnet » Tue Apr 17, 2018 12:14 am

NYC_Guy wrote:
Mon Apr 16, 2018 7:09 pm
Assuming you also want to do the 25% profit share contribution, the ideal number is $24,667, but you will pay a bit more in FICA. This amount also has to be reasonable in relation to the work performed by her.
How does profit-sharing affect the answer? Is it not non-taxable in all respects, until withdrawn from deferred savings?

duckfan101
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Joined: Wed Mar 28, 2018 1:42 pm

Re: Paying Wife in S-corp 401k max without Take-home

Post by duckfan101 » Tue Apr 17, 2018 12:29 am

spammagnet wrote:
Tue Apr 17, 2018 12:14 am
NYC_Guy wrote:
Mon Apr 16, 2018 7:09 pm
Assuming you also want to do the 25% profit share contribution, the ideal number is $24,667, but you will pay a bit more in FICA. This amount also has to be reasonable in relation to the work performed by her.
How does profit-sharing affect the answer? Is it not non-taxable in all respects, until withdrawn from deferred savings?
I was thinking the same. I am pretty sure w2 income is different from profit sharing contributions from what I learned here earlier.

Rob1
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Re: Paying Wife in S-corp 401k max without Take-home

Post by Rob1 » Tue Apr 17, 2018 1:23 am

I believe this is how it works. First, the amount has to be grossed up above $18500 to cover the 7.65% for SS and Medicare. That triggers federal and state income tax withholding on the difference between gross pay and 18500 (so it has to be grossed up even more). There may also be some small taxes, like state disability insurance.

That said, I have used Gusto in a similar situation. If the total pay isn’t high enough, Gusto simply reduces the amount of income tax withholding. It gives you a message but still processes the payroll.
Last edited by Rob1 on Tue Apr 17, 2018 1:41 am, edited 1 time in total.

Rob1
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Re: Paying Wife in S-corp 401k max without Take-home

Post by Rob1 » Tue Apr 17, 2018 1:34 am

duckfan101 wrote:
Tue Apr 17, 2018 12:29 am
spammagnet wrote:
Tue Apr 17, 2018 12:14 am
NYC_Guy wrote:
Mon Apr 16, 2018 7:09 pm
Assuming you also want to do the 25% profit share contribution, the ideal number is $24,667, but you will pay a bit more in FICA. This amount also has to be reasonable in relation to the work performed by her.
How does profit-sharing affect the answer? Is it not non-taxable in all respects, until withdrawn from deferred savings?
I was thinking the same. I am pretty sure w2 income is different from profit sharing contributions from what I learned here earlier.
Yes, profit sharing is a completely separate matter. What I do for profit sharing is calculate a year end bonus that increases total salary for the year to maximize the 25% allowable profit sharing and reduce company profit to zero.

However, with the new tax laws, some may instead use the new qualified business income passthrough deduction of 20% to payout profits.

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

Re: Paying Wife in S-corp 401k max without Take-home

Post by Spirit Rider » Tue Apr 17, 2018 9:13 am

Annual additions (employee + employer contributions can not exceed 100% of compensation. It does not matter that the employer is the one making the employer contribution.

$24,667 * 25% = $6,166.75

$18,500 + $6,166.75 = $24,66.75 <= $24,667

If you paid the minimum wages to make an $18.5K employee elective deferral = $20,032.50.

Your employer contribution would be limited to 20,032.50 - $18.5K = $1,532.50 and not $20,032.50 * 25% = $5,008.13

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

Re: Paying Wife in S-corp 401k max without Take-home

Post by Spirit Rider » Tue Apr 17, 2018 9:31 am

Rob1 wrote:
Tue Apr 17, 2018 1:23 am
I believe this is how it works. First, the amount has to be grossed up above $18500 to cover the 7.65% for SS and Medicare. That triggers federal and state income tax withholding on the difference between gross pay and 18500 (so it has to be grossed up even more). There may also be some small taxes, like state disability insurance.
The $20,032.50 - $18.500 = $1,532.50 not enoung to trigger income tax withholding unless you unwisely do this as a single weekly/monthly payroll.

spammagnet
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Re: Paying Wife in S-corp 401k max without Take-home

Post by spammagnet » Tue Apr 17, 2018 10:40 am

Rob1 wrote:
Tue Apr 17, 2018 1:34 am
Yes, profit sharing is a completely separate matter. What I do for profit sharing is calculate a year end bonus that increases total salary for the year to maximize the 25% allowable profit sharing and reduce company profit to zero.
Ignoring the 20% deduction on pass-through, does the bonus not increase payroll taxes (SS/Medicare)? Is the reduction in income tax on the owner distribution enough to offset (exceed) the additional payroll tax?

Not ignoring the pass-through deduction, does a 25% reduction in income (due to profit-sharing) trump the 20% pass-through deduction?

NYC_Guy
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Location: New York

Re: Paying Wife in S-corp 401k max without Take-home

Post by NYC_Guy » Tue Apr 17, 2018 11:08 am

spammagnet wrote:
Tue Apr 17, 2018 10:40 am
Rob1 wrote:
Tue Apr 17, 2018 1:34 am
Yes, profit sharing is a completely separate matter. What I do for profit sharing is calculate a year end bonus that increases total salary for the year to maximize the 25% allowable profit sharing and reduce company profit to zero.
Ignoring the 20% deduction on pass-through, does the bonus not increase payroll taxes (SS/Medicare)? Is the reduction in income tax on the owner distribution enough to offset (exceed) the additional payroll tax?

Not ignoring the pass-through deduction, does a 25% reduction in income (due to profit-sharing) trump the 20% pass-through deduction?
Many of us don’t qualify for the 20% pass-thru deduct. So I offset our current marginal rate of >45% by setting my wife’s salary at $24,667 and effectively sheltering all of that amount in a Solo 401k. Her part-time biz generates another $10k or so of earnings ($45k revenue, $25k salary, $10k of other expenses). If she paid herself less, say $20k, we’d save FICA on $5k but lose the ability to shelter that $5k from >45% marginal rates. For us, her FICA contributions are worthless (because she was a SAHM for so long, her SS spousal share exceeds what her primary benefit will be). Everyone’s math is different, of course. I’m expecting our marginal rates to be much lower in retirement.

spammagnet
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Re: Paying Wife in S-corp 401k max without Take-home

Post by spammagnet » Tue Apr 17, 2018 11:31 am

I'm a new LLC and am exploring different options for tax avoidance. My marginal rates won't be anywhere near yours but the idea of a salary bonus with the benefit of increasing profit-sharing is worth evaluation.

I'll run it through a spreadsheet to see what happens.

Thanks

Rob1
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Joined: Thu May 04, 2017 2:57 pm

Re: Paying Wife in S-corp 401k max without Take-home

Post by Rob1 » Fri Apr 20, 2018 1:06 am

spammagnet wrote:
Tue Apr 17, 2018 10:40 am
Rob1 wrote:
Tue Apr 17, 2018 1:34 am
Yes, profit sharing is a completely separate matter. What I do for profit sharing is calculate a year end bonus that increases total salary for the year to maximize the 25% allowable profit sharing and reduce company profit to zero.
Ignoring the 20% deduction on pass-through, does the bonus not increase payroll taxes (SS/Medicare)? Is the reduction in income tax on the owner distribution enough to offset (exceed) the additional payroll tax?

Not ignoring the pass-through deduction, does a 25% reduction in income (due to profit-sharing) trump the 20% pass-through deduction?

These are good questions, and hard to answer. My CPA didn't have a clear answer on which is best. I think there are too many factors (how long would the profit sharing grow before withdrawals, future marginal tax rates, etc.). To me, I have plenty in taxable accounts and little need for more income now, so I'll likely continue to maximize profit sharing.

spammagnet
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Joined: Wed Apr 27, 2016 9:42 pm

Re: Paying Wife in S-corp 401k max without Take-home

Post by spammagnet » Fri Apr 20, 2018 6:52 am

Rob1 wrote:
Fri Apr 20, 2018 1:06 am
These are good questions, and hard to answer. My CPA didn't have a clear answer on which is best. I think there are too many factors (how long would the profit sharing grow before withdrawals, future marginal tax rates, etc.). To me, I have plenty in taxable accounts and little need for more income now, so I'll likely continue to maximize profit sharing.
Coincidentally, I played around with those numbers last night. At my expected billing rate and % engagement, I'll be in the 22% tax bracket. If I got the numbers right, and I think I was close enough for gummint purposes, it behooves me to take the business revenue as pass-through income rather than W-2 income.

I have internally published pay scales from my current employer to support my planned W-2 pay rate, so I won't be skirting the law in limiting my W-2 income. Also, most of my investments are in deferred accounts. It's advantageous for me to accumulate some taxable assets, for flexibility, where it doesn't cost me more to do so.

duckfan101
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Joined: Wed Mar 28, 2018 1:42 pm

Re: Paying Wife in S-corp 401k max without Take-home

Post by duckfan101 » Sat Apr 21, 2018 1:12 pm

Spirit Rider wrote:
Tue Apr 17, 2018 9:13 am
Annual additions (employee + employer contributions can not exceed 100% of compensation. It does not matter that the employer is the one making the employer contribution.

$24,667 * 25% = $6,166.75

$18,500 + $6,166.75 = $24,66.75 <= $24,667

If you paid the minimum wages to make an $18.5K employee elective deferral = $20,032.50.

Your employer contribution would be limited to 20,032.50 - $18.5K = $1,532.50 and not $20,032.50 * 25% = $5,008.13
You saved me from making a really big mistake. Much thanks!

Is there a rule on needing to contribute the same profit sharing %?


Since my salary is higher than my wife's (and my wife is deferring nearly 100% to solo 401k) which leaves very little room to do an employER contribution for her.

Like this?
Wife
20,032.50 - $18.5K = $1,532.50

Me
36,000.00 x .25 = $9,000.00

For some reason I was thinking I couldn't favor one employee over another when it came to percentages.

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

Re: Paying Wife in S-corp 401k max without Take-home

Post by Spirit Rider » Sat Apr 21, 2018 2:40 pm

duckfan101 wrote:
Sat Apr 21, 2018 1:12 pm
Is there a rule on needing to contribute the same profit sharing %?
Most standard 401k plans certainly including yours, require the employer contribution to be the exact same percentage for all employees
Since my salary is higher than my wife's (and my wife is deferring nearly 100% to solo 401k) which leaves very little room to do an employER contribution for her.

Like this? Wife 20,032.50 - $18.5K = $1,532.50, Me 36,000.00 x .25 = $9,000.00

For some reason I was thinking I couldn't favor one employee over another when it came to percentages.
You were thinking correctly.

In the above example, your maximum employer contributions would be:

$1,532.50 / $20,032.50 * $36,000 ~= $2,754

I would venture a guess that many S-Corps with their wife as an employee and a one-participant 401k plan make this mistake. I wouldn't have thought of it if MarkNYC hadn't mentioned it. That is why he is a professional and the rest of us are also-rans.

Even though this is increasing FICA, you are getting a dollar for dollar increase in deductible employer contributions for each additional dollar of compensation. The simple formula to determine this amount is employee elective contribution limit / .75. $18.500 / .75 = $24,666.67

Personally, I wouldn't use that exact number. It then looks like your are calculating an exact number and not paying your spouse a Fair Market Value (FMV) wage for a given number of hours. Which of course you certainly are not doing. We are just discussing a what if scenario.

I would pay $25K or even better $26K, i.e. $25/hour for 20 hours = $500/week * 52 weeks = $26K/year.

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