Solo 401k spouse contributions - proper setup and tax filing

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Topic Author
pgreensoup
Posts: 2
Joined: Tue Apr 09, 2019 5:38 pm

Solo 401k spouse contributions - proper setup and tax filing

Post by pgreensoup » Tue Apr 09, 2019 5:51 pm

I’ve read the solo 401k wiki https://www.bogleheads.org/wiki/Solo_401%28k%29_plan, I’ve read this threadviewtopic.php?f=2&t=87799&p=3683196&hil ... 9#p3683196 on spouse contributions, but I’m still a bit confused about how spouse contributions to a solo 401k work - specifically how you organize it on your taxes. Perhaps it is because my situation is a bit different than the ones referred to in the threads. (BTW, I’ve also talked to Vanguard and they were pretty non-committal and told me to talk to a tax professional)

Our situation:
Neither my wife nor I have a W2 job. Both my wife and I do consulting work that gives us 1099 income from multiple sources. Currently all of our work is within “education consulting” Using round numbers, I make 70,000 and my wife makes 30,000 (on 1099). Also, the goal is to pay the least amount of tax and to put away as much money as possible (even though it would seem that it would be difficult to live on what is left over).

What I tried to do:
After reading up, I thought I could set up one solo401k as a Sole Proprietor under my name with accounts for both of us. Divide up all of our earnings and split them across two schedule C’s. Then contribute equally (salary deferral) 18,500 each into Roth component and then also do the calculation for the employer contribution equally into both non-both accounts. BUT I couldn’t get turbo tax to do it that way so I hired someone to do my taxes….

What I ended up doing via my tax professional:
One solo 401k as a SP with accounts for myself and my wife. Individual schedule C’s that listed only the income according to our names, (so it was not split 50/50). Salary deferrals of 18,500 each into Roth component. Separate calculations were done for the employer contributions based on the schedule C amounts. So the employer contributions were higher for me and smaller for my wife.

Did I do something wrong? Should both my wife and I have our own solo 401K or should we just have the one under my name where we both have accounts within it? The way it is currently set up does not seem right to me because the whole point of spouse contributions should be that she could get equal employer contributions even if she had zero 1099 income in her own name.

I really appreciate any advice or guidance this group can provide.

Plutus_mind
Posts: 3
Joined: Tue Apr 16, 2019 11:47 pm

Re: Solo 401k spouse contributions - proper setup and tax filing

Post by Plutus_mind » Wed Apr 17, 2019 5:08 pm

What you are saying with you making $70,000 and your wife at $30,000 each receiving income from multiple 1099 sources. "divide up all of our earnings and split them across two schedule C's...then contribute equally". THIS CANNOT BE DONE. Each Wife and Husband (if sole prop) would need to report their own income and expenses (Schedule C) or as a Partnership on 1065.

For Sole Proprietorship, BOTH contributions (Employee Deductions and Employer Profit Sharing) are reported on Individual Tax Return 1040, Schedule 1, Line 28: Self-employed SEP, SIMPLE, and Qualified Plans). As a side note, if you did have employees, their profit-sharing contribution that you made as an Employer would be deductible under Schedule C, but you would not be eligible for a solo 401k at this point.

The key to bringing in a spouse under a solo 401(k) is that both husband and wife have to have earned income from the same business activity. In other words, if you are married and both husband and wife want a Solo 401(k) account, the easiest setup would be to operate the business as a “qualified joint venture, where this is generally an unincorpated business jointly owned by a married couple generally classified as a partnership for Federal tax purposes….whose only members are a married couple filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.

In short, both husband and wife own the business, both materially participate in it, and you split the income and expenses. You would not have to set up a S Corp or LLC, you would you just file a joint return with two Schedule C’s and two Schedule SE’s as sole proprietors. You would set up one solo 401k plan with two participants.

As a side note: If you had a one spouse that was the breadwinner and the other spouse as a homemaker, for the homemaker spouse to be able to contribute to the Solo 401(k), they would need earned income compensation from the business. This would most likely be where husband issues wife a W-2 for compensation from the business. Therefore, wife could contribute voluntary employee contributions up to $19,000 in 2019 (or up to earned income from business, whichever is less), and the Employer Profit Sharing Contribution, generally, would be 25% of spouse earned income from the business as reported on the W-2. And other spouse who is “owner” of the business could also make up to $19,000 in voluntary employee contributions whereas the Employer Profit Sharing amount would generally be a maximum of 20% Net Income.

If you have one person as the owner and the other person as an independent contractor on 1099, you would have two separate businesses, and two solo 401(k) plans with one participant each. It’s more complicated than just having husband and wife co-own the same business.

Furthermore: It would be equal in such a scenario where one spouse, say the Husband, makes all income of $100,000, with wife as the homemaker, where the husband "pays" wife $50,000 and Husband makes $50,000 (again ignoring expenses) where the Profit Sharing contribution will be 25% of Wife's Compensation as a W-2 employee and 20% of Net Income for Husband as 1099.

Good Luck!

Plutus

Spirit Rider
Posts: 11692
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401k spouse contributions - proper setup and tax filing

Post by Spirit Rider » Wed Apr 17, 2019 6:50 pm

@Plutus_mind is correct, your tax professional was not. You and your wife can not contribute from two differently owned businesses to the same one-participant 401k. They need to be treated as one qualified joint venture. I would add a small correction, the ownership interest in a qualified joint venture does not have to be 50:50.

So there would not necessarily be anything wrong with the tax return, because a qualified joint venture election would involve you each filing a separate Schedule C and separate Schedule SE. See the Schedule C instructions on "qualified joint ventures".

What may need to be corrected, is the two current businesses yours and your wife's should be treated as one joint venture. Either revenue payments made to each of you and/or jointly and deposited in a joint account. Alternately, the business could be operated under a DBA/"fictitious" name and all business transactions done through business financial accounts.

Topic Author
pgreensoup
Posts: 2
Joined: Tue Apr 09, 2019 5:38 pm

Re: Solo 401k spouse contributions - proper setup and tax filing

Post by pgreensoup » Fri Nov 08, 2019 10:06 am

Thank you both, @Plutus_mind and @Spirit Rider. Thanks for the clarification on being treated as a Qualified Joint Venture. I've spoken with my tax preparer and we are set to move forward for 2019 taxes.

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