solo 401k spousal contribution to minimize taxes

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basky
Posts: 2
Joined: Sat May 26, 2018 1:51 pm

solo 401k spousal contribution to minimize taxes

Post by basky » Sat May 26, 2018 2:14 pm

I've a job with W2 income but no 401k plan. I also have a Single owner LLC for recruitment related services. I've opened a Solo 401K plan to minimize tax bill.

I'm trying to utilize the Solo 401k's spousal contribution option by taking my spouse help for my LLC, to minimize tax bill ( if it does). QJV is not applicable for us.
Note, I may only need to pay Medicare taxes on my SE income, but trying to save on income tax using spousal contribution to solo 401k.

I do not wish to run payrolls for my LLC and issue a W2 to spouse, open to pay SE taxes and estimated taxes as needed.... but since the spousal contribution to solo 401k also have EE + ER contribution, not sure how it has bto be handled.

Please let me know -
1) What steps needs to be taken after my wife opens opens employee account for my solo 401k plan.
how to make payments to Solo 401k spouse account?

2)Where to Capture the spousal solo 401k contribution amount for tax deduction - Would it go to my schedule C line 19?
Or 1040 line 28 along with my contribution to my solo 401k?

3) Do we need to pay SS taxes in her name and Tax ID? Or, can it be part of the SE taxes paid overall from my our combined 1040 + Schedule C for me?

Thank you!
Last edited by basky on Sun May 27, 2018 1:51 am, edited 1 time in total.

Spirit Rider
Posts: 9146
Joined: Fri Mar 02, 2007 2:39 pm

Re: solo 401k spousal contribution to minimize taxes

Post by Spirit Rider » Sat May 26, 2018 8:07 pm

basky wrote:
Sat May 26, 2018 2:14 pm
I do not wish to run payrolls for my LLC and issue a W2 to spouse, open to pay SE taxes and estimated taxes as needed.... but since the spousal contribution to solo 401k also have EE + ER contribution, not sure how it has bto be handled.
There is no such concept of a spousal contribution in a 401k as there are in IRAs. Only employees are eligible to to be participants in a 401k. If you do not wish your spouse to be a W-2 employee of your LLC. There are only two options:
  1. Change the LLC to a two-member LLC. The IRS will consider this a partnership and require the partnership file a Form 1065 tax return. The partnership will have to adopt a one-participant 401k plan. Then each partner (spouse) will open a separate 401k account under that plan. The partnership must make the employee elective contributions on behalf of each partner and the employer contributions for each partner to their respective accounts. Their ownership interest in the partnership will determine the allocation of their net self-employment earnings.
  2. If you are in a community property state you can elect the single member LLC to be treated as a Qualified Joint Venture (QJV). If you are not in a community property state you must dissolve the LLC to elect a sole proprietorship to be treated as a QJV. If you are providing personal services, the LLC is of no practical use and business and liability insurance are necessary anyway.
    See the Schedule C Instructions for a description of a QJV. The cliff notes are that you elect a QJV by allocating the business income and expenses for each spouse on their own Schedule C and Schedule SE. They then have their own net self-employment earnings (business profit - 1/2 SE tax) in which to make employee elective contributions and employer contributions to their own accounts of a one-participant 401k of the LLC (community property state) or sole proprietorship (non-community property state).
1) What steps needs to be taken after my wife opens opens employee account for my solo 401k plan.
how to make payments to Solo 401k spouse account?
See above
2) Where to Capture the spousal solo 401k contribution amount for tax deduction - Would it go to my schedule C line 19?
Or 1040 line 28 along with my contribution to my solo 401k?
If a partnership, or QJV both your employee and employer contributions would go on Form 1040 line 28. If she were a W-2 employee, her employee elective contributions would be deducted from her W-2 wages after mandatory deductions (income tax withholding, FICA tax deductions, etc...)
3) Do we need to pay SS taxes in her name and Tax ID? Or, can it be part of the SE taxes paid overall from my our combined 1040 + Schedule C for me?
If partnership or QJV, you would each have a Schedule SE and combine SE taxes on your Form 1040. If she was an employee, your Schedule SE and SE taxes would be reported on your Form 1040, and her FICA would be deducted, filed and paid to the IRS along with FUTA/SUTA, etc...

Your questions indicate that you really need to consider engaging a professional for at least the first year or two.

basky
Posts: 2
Joined: Sat May 26, 2018 1:51 pm

Re: solo 401k spousal contribution to minimize taxes

Post by basky » Sun May 27, 2018 1:58 am

Thank you! Partnership seems to be best option for me.
I'm not for a community property state.
I revoked s-corp classification for my LLC some time back because ER portion of the excess SS taxes are not refundable.

Spirit Rider
Posts: 9146
Joined: Fri Mar 02, 2007 2:39 pm

Re: solo 401k spousal contribution to minimize taxes

Post by Spirit Rider » Sun May 27, 2018 11:37 am

I would set your wife up as a W-2 employee before I would start a partnership. Far less work and complexity is involved. I still think dissolving the LLC and going with a QJV is the most straightforward approach.

What exactly do you think is the LLC benefit to your business model that leads you to think you need one. LLCs over-promise and under-perform when it comes to asset protection for service oriented businesses without non-spouse employees.

One important requirement for both a partnership and a QJV. You spouse must meet the "Material Participation" standards.

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