Solo Prop. in the office with employees but additional income outside office

[Guest]

Wife is a solo prop with several employees and has no retirement plan. She also does surveys at home (after office and weekends) and make some money. From retirement plan perspectives, are these considered separate business entities? She receives insurance payments under business TIN and survey money separately.

 

Since she has employees in medical office, she is not eligible for solo 401k. But, is she eligible for solo 401 k from the income generated from surveys? Keep in mind, all of her income from medical office flows through her personal tax return through a schedule C.

[jfoxcpacfp]

How long has your wife owned her Sole Proprietorship and how long have her employees worked for her?

solo prop. and employees from September 2015.

[jfoxcpacfp]

No, she just missed it. These 2 businesses are a controlled group and your wife cannot have a SOLO 401k for the survey income and not cover employees in her 100% owned business (unless the employees each worked < 1,000 hours since last September). If the employees had been employees for < 1 year (i.e. if she had opened the business in January 2016), she would be able to do so for this year only but not for 2017 as she would have to cover employees who have worked for 1 year.

However, your wife is in a strange spot. She is past the eligibility notification date for employee participation for 2016 but she has no requirements to "notify herself" of eligibility to participate in her SOLO-k. If she notifies employees that she intends to start a 401k as of 1/1/17, I wonder if she can contribute to the SOLOk for this year. I do not know the answer. Maybe there is some exception that will allow her to contribute - perhaps Kon will step in and advise.

btw, she can also fix the "mistake" (late notification): the IRS says she can make a "corrective contribution" and maintain safe harbor status if she wants to set up a 401k through the business for 2016. Of course, having the plan for the business for 2016 will be much more costly. There is no hard and fast rule that I can find, though.

[litovskyassetmanagement]

jfoxcpacfp wrote:

No, she just missed it. These 2 businesses are a controlled group and your wife cannot have a SOLO 401k for the survey income and not cover employees in her 100% owned business (unless the employees each worked < 1,000 hours since last September). If the employees had been employees for < 1 year (i.e. if she had opened the business in January 2016), she would be able to do so for this year only but not for 2017 as she would have to cover employees who have worked for 1 year.

However, your wife is in a strange spot. She is past the eligibility notification date for employee participation for 2016 but she has no requirements to “notify herself” of eligibility to participate in her SOLO-k. If she notifies employees that she intends to start a 401k as of 1/1/17, I wonder if she can contribute to the SOLOk for this year. I do not know the answer. Maybe there is some exception that will allow her to contribute – perhaps Kon will step in and advise.

btw, she can also fix the “mistake” (late notification): the IRS says she can make a “corrective contribution” and maintain safe harbor status if she wants to set up a 401k through the business for 2016. Of course, having the plan for the business for 2016 will be much more costly. There is no hard and fast rule that I can find, though.

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Actually, she could have done a SEP for 2015, but not solo 401k (unless she opened that prior to hiring employees, and when she hired employees, I don't believe she would be able to contribute).  Solo 401k is just a 401k plan with a 'canned' plan document, so you have to be subject to the same eligibility rules (just like for a SEP).  For example, if her entity was around prior to hiring employees, say it was opened early in 2015, and employees came later, she could have had a 401k plan for 2015 that excluded employees until they were eligible to join the plan in 2016.  But that wouldn't be a solo 401k, that's for sure - the rules for solo 401k specifically exclude employees (eligible or not) - the business has to have only the owner and/or spouse.

Yes indeed, that's a controlled group for sure.  She owns 100% of both businesses, and one is a solo proprietorship.

This is not a bad situation, however.  If your wife makes a good income, and has employees that don't work more than 1000 hours (and who are younger than her), she could have a 401k plan with profit sharing with minimal employer contribution (though the admin cost would be higher than for a solo 401k).  Setting up this type of plan for a small medical practice is a better deal than paying taxes on that money (if the demographics is favorable, which is something that would require a plan design study).

1) Employees are young (around 30-35) but wife is younger.  ops:

2) Could not do SEP IRA as we do backdoor Roth IRA every Jan 1st.

3) I wonder re: following scenario: I manage her accounts, bookkeeping, reconciliation, office supplies, paying bills/rent, website updates etc. & roughly put in about 5 hours/week in the after hours or weekends. I would like to send her a reasonable invoice for above work for the past 12-15 months and she could pay me and maybe issue me a 1099. I do have survey/freelancing consultation income (around 10K/year) that typically flows through Schedule C (married filing joint return). I do have a 401k from the main job with some employer contribution and I max it out every year. Now, can I open a solo 401k on this (freelancing/survey/1099 income from wife) income and allow employer contribution (On 10K income it is roughly $1800) only. I cannot contribute myself in this 401k as I already maxed the other 401k. This would still be less than 53K annually.

4) What's reasonable rate for one hour of accounting/office management? I was thinking $30/hour x 240 (5 Hour/week x 48 weeks) =$ 7200.

5) Since we have joint tax return, would a payment from her for my services affect my sole prop. status (in the terms of my ability of opening and contributing to a solo 401k) in any way? Attribution rules?

[litovskyassetmanagement]

wci wrote:

1) Employees are young (around 30-35) but wife is younger.

2) Could not do SEP IRA as we do backdoor Roth IRA every Jan 1st.

3) I wonder re: following scenario: I manage her accounts, bookkeeping, reconciliation, office supplies, paying bills/rent, website updates etc. & roughly put in about 5 hours/week in the after hours or weekends. I would like to send her a reasonable invoice for above work for the past 12-15 months and she could pay me and maybe issue me a 1099. I do have survey/freelancing consultation income (around 10K/year) that typically flows through Schedule C (married filing joint return). I do have a 401k from the main job with some employer contribution and I max it out every year. Now, can I open a solo 401k on this (freelancing/survey/1099 income from wife) income and allow employer contribution (On 10K income it is roughly $1800) only. I cannot contribute myself in this 401k as I already maxed the other 401k. This would still be less than 53K annually.

4) What’s reasonable rate for one hour of accounting/office management? I was thinking $30/hour x 240 (5 Hour/week x 48 weeks) =$ 7200.

5) Since we have joint tax return, would a payment from her for my services affect my sole prop. status (in the terms of my ability of opening and contributing to a solo 401k) in any way? Attribution rules?

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That's not an issue as long as there aren't older employees, and other employees are not highly compensated and significantly older.  If she had a 60 year old highly compensated employee, that would definitely be a problem as far as profit sharing.  I would pursue this avenue first.

Yes, you can be put on the payroll, that's always something to consider.  You might do the salary deferral into this plan, as it could be the lowest cost/best investment plan you can possibly have vs. your employer's plan.  You can NOT do a solo 401k for this income as it would be a controlled group situation.  And before you ask, you also couldn't do 'after tax' with this type of plan (401k with employees) as it would not work.

Also, if you are married and your wife has employees, there are other controlled group concerns which can be alleviated by using an entity for your sole proprietorship.  However, you have to be very careful because in some community property states you can still end up with controlled group situations under various circumstances, so you would really need to consider all of the facts before deciding on what you should be doing.  Having a 401k for the practice where you are on the payroll is probably the best solution, but prior to making that decision you'll need to do a design study to make sure the 401k with profit sharing is cost-effective given employer contribution and administrative cost.

 

Thank you Ms. Turner and Mr. Litovsky,

 

1) It seems I should "keep quiet" this year.

2) A S-Corp formation for wife's business should be able to solve most of these issues.

3) What are the benefits of me becoming a shareholder of her S-corp?

[jfoxcpacfp]

wci wrote:

Thank you Ms. Turner and Mr. Litovsky,

1) It seems I should “keep quiet” this year.

2) A S-Corp formation for wife’s business should be able to solve most of these issues.

3) What are the benefits of me becoming a shareholder of her S-corp?

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1. Sounds like it.


2. S-corp v. LLC v. Sole Proprietorship will make no difference as to choice of or contribution amount to retirement plans


3. Getting in a little deep here, really need to discuss with your CPA and/or a financial planner with expertise in this area. On the surface, I see little benefit given the facts and circumstances, but there is surely more to the story.

#2- I was thinking that with a S- corp, wife will be an employee of the corporation and I should no longer have restriction on receiving a 1099 from the corporation as well as opening a 401k for my extra income. Unless S-corp being a pass through entity, controlled group situation still apply to the spouse who is not on a payroll (will be indep. Contractork) or shareholder of the corporation.

[litovskyassetmanagement]

wci wrote:

#2- I was thinking that with a S- corp, wife will be an employee of the corporation and I should no longer have restriction on receiving a 1099 from the corporation as well as opening a 401k for my extra income. Unless S-corp being a pass through entity, controlled group situation still apply to the spouse who is not on a payroll (will be indep. Contractork) or shareholder of the corporation.

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Controlled group situation.  There is no way to have a separate plan for you under your wife's entity.  Also, depending on your state (community property or not) and whether you have children or not will also have an impact on whether you can have a separate 401k plan for ANY 1099 income you might receive even if not from your wife's practice.

[jfoxcpacfp]

wci wrote:

#2- I was thinking that with a S- corp, wife will be an employee of the corporation and I should no longer have restriction on receiving a 1099 from the corporation as well as opening a 401k for my extra income. Unless S-corp being a pass through entity, controlled group situation still apply to the spouse who is not on a payroll (will be indep. Contractork) or shareholder of the corporation.

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Spouses are treated as the same person in ownership of a controlled group. Generally "the ownership interests of one spouse are attributed to the other. However, there is no attribution between spouses if there is no direct ownership or participation in the management of such corporation at any time during the taxable year. Additionally, the spouse cannot be a member of the board of directors, a fiduciary, or an employee of such organization at any time during such taxable year."

(Quoted from CPE for Related Employers by Garrett and Wright)

Agree. California (Community property state) and having two children.