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  • Solo 401k Limit with Multiple Businesses

    I have a question about maximizing individual 401k contributions in the setting of multiple side businesses with one operating at a loss this year. My sources of income are:

    1. W2 employed physician with no access to a group retirement account, but with W2 wages over the social security tax base maximum.
    2. 1099 independent contractor physician with income around $19K
    3. Started a business this year that operated at a loss due to startup costs ($12K income with $22K expenses for a net loss of around $10k) but will be profitable going forward

    I have a solo 401k and would like to put away as much as possible. I can calculate my max contribution based only on my 1099 income (#2 above) by taking my Profit less 1/2 of my SE taxes to get around $18.5k contribution. My question is how does having another business with a loss affect this. The types of work are different for the 1099 work and the new business, but for both I'm the "owner" or sole person. I have separate EINs for each as the business in #3 is set up as a single member LLC.

    Do you think I need to reduce my 1099 income by the net loss amount of my separate business startup to allow closer to $10K in contribution space, or can they be treated separately and contribute the full roughly $18.5K to a solo 401k?

  • #2
    I think the income and loss need to be combined. Clearly the two independent entities fall under a Controlled Group. Also, I believe the loss will reduce your overall self employment tax. To take the loss on your tax return, have the reduced self employment tax as a result of the loss from one entity reducing your overall self employment income, but only consider the income from one entity for purposes of determining retirement contribution probably wouldn't fly

    Note I'm not a CPA

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    • #3
      Also wouldn't you do employee?

      Comment


      • #4
        Originally posted by Peds View Post
        Also wouldn't you do employee?
        I'm not sure if the employee vs employer designation matters for individual 401k. I was following the IRS Pub 560 worksheet for self employed. It has you input your "allowable elective deferrals" on line 9 up to the "employee" limit, which is where all of my contributions will come from since the total income is still under $19K. The Oblivious Investor also has a good calculator for this that shows some of the work behind the calculation.

        Since the self employment tax on this side income is only 2.9% medicare (because W2 earnings paid off all of the social security taxes up to the limit), the main things I'm looking at are how this business loss will change my total taxable income and how it will affect my retirement plan contributions. Maybe there is a way to carry forward some of the losses and still contribute the max to the solo401k, or another tax planning strategy, but I was hoping to be able to just do both this year. Thanks for any insight!

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        • #5
          I just don’t see how you could reasonably exclude the business with loss from consideration

          the solo 401k is established by the employer and the employer is you as a sole proprietor

          the LLC is aggregated with the profitable business as a Controlled Group since they’re both wholly owned by you

          both are going to get reported on a schedule C on your return

          if the business had profit you wouldn’t exclude it

          if the business had employees you couldn’t exclude it

          the practice of not claiming legitimate deductible expenses from even a profitable business, for the purpose of increasing allowable retirement plan contributions, is explicitly prohibited

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          • #6
            jacoavlu is correct.

            You must combine all profits and all losses to determine your self-employed earned income (business profit - 1/2 SE tax) available for retirement plan contributions.

            See Step 1 of the Deduction Worksheet for Self-Employed in IRS publication 560, Chapter 5, page 22.

            "Enter your net profit from Schedule C (Form 1040), line 31; Schedule C-EZ (Form 1040), line 3; Schedule F (Form 1040), line 34;* or Schedule K-1 (Form 1065),* box 14, code A.** For information on other income included in net profit from self-employment, see the Instructions for Schedule SE (Form 1040)."

            See Instructions for Schedule SE, page 2, More Than One Business.

            "If you had two or more businesses subject to self-employment tax, your net earnings from self-employment are the combined net earnings from all of your businesses. If you had a loss in one business, it reduces the income from another. Figure the combined SE tax on one Schedule SE."

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            • #7
              Originally posted by spiritrider View Post
              jacoavlu is correct.

              You must combine all profits and all losses to determine your self-employed earned income (business profit - 1/2 SE tax) available for retirement plan contributions.

              See Step 1 of the Deduction Worksheet for Self-Employed in IRS publication 560, Chapter 5, page 22.

              "Enter your net profit from Schedule C (Form 1040), line 31; Schedule C-EZ (Form 1040), line 3; Schedule F (Form 1040), line 34;* or Schedule K-1 (Form 1065),* box 14, code A.** For information on other income included in net profit from self-employment, see the Instructions for Schedule SE (Form 1040)."

              See Instructions for Schedule SE, page 2, More Than One Business.

              "If you had two or more businesses subject to self-employment tax, your net earnings from self-employment are the combined net earnings from all of your businesses. If you had a loss in one business, it reduces the income from another. Figure the combined SE tax on one Schedule SE."
              Thanks to both jacoavlu and spiritrider for taking the time to give clarification. Makes sense to not "double dip", but at least it will reduce total SE income and total tax burden this year, despite allowing a lower solo 401k contribution.

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              • #8
                Bumping this thread to ask how one would set up a single Solo 401k meant to encompass multiple income sources. I am doing it at Vanguard, would it be best to just put my name as the organization and select Sole Proprietership, even though some of the income streams may be set up as different entities?

                Comment


                • #9
                  You have to combine all sources of SE income - use what appears on your Sch SE less 1/2 FICA tax. Of course, if you own an s-corp, you'll have to include wages from that, too. Not SE income but treated that way for the limitation. It's calculated based on income from the businesses you control (in general terms).

                  (Sorry, just now saw that spiritrider had spoken )
                  Last edited by jfoxcpacfp; 09-03-2020, 01:59 PM. Reason: added apology at the end
                  Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                  Comment


                  • #10
                    Originally posted by ahamidi View Post
                    Bumping this thread to ask how one would set up a single Solo 401k meant to encompass multiple income sources. I am doing it at Vanguard, would it be best to just put my name as the organization and select Sole Proprietership, even though some of the income streams may be set up as different entities?
                    Can you give us a little more info?
                    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                    Comment


                    • #11
                      Originally posted by jfoxcpacfp View Post

                      Can you give us a little more info?
                      Sure, so I have 3 sources of 1099 income for the year. One is a sole proprieter, and the other two are LLC. Looking to set up a single Solo 401k with Vanguard. I understand that all sources of SE income need to be combined, just wondering how to initially set up the account with Vanguard. Given the multiple income sources, can I just list my name as the organization name and Sole Proprietorship as the entity type?

                      Comment


                      • #12
                        Originally posted by ahamidi View Post

                        Sure, so I have 3 sources of 1099 income for the year. One is a sole proprieter, and the other two are LLC. Looking to set up a single Solo 401k with Vanguard. I understand that all sources of SE income need to be combined, just wondering how to initially set up the account with Vanguard. Given the multiple income sources, can I just list my name as the organization name and Sole Proprietorship as the entity type?
                        I'm not the expert here, but I don't see how it could matter whether you choose SP or LLC. They are treated as one income stream for purposes of contributing to your solo-k.
                        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                        Comment


                        • #13
                          Originally posted by jfoxcpacfp View Post

                          I'm not the expert here, but I don't see how it could matter whether you choose SP or LLC. They are treated as one income stream for purposes of contributing to your solo-k.
                          Understood, thanks so much for your insight!

                          Comment


                          • #14
                            Originally posted by ahamidi View Post
                            Sure, so I have 3 sources of 1099 income for the year. One is a sole proprieter, and the other two are LLC. Looking to set up a single Solo 401k with Vanguard. I understand that all sources of SE income need to be combined, just wondering how to initially set up the account with Vanguard. Given the multiple income sources, can I just list my name as the organization name and Sole Proprietorship as the entity type
                            I do not have access to a Vanguard Individual 401k Adoption Agreement, but Vanguard like E-Trade, Schwab and TD Ameritrade use Ascensus for their one-participant 401k plan Document and Adoption Agreement. All of the latter three and most likely Vanguard have the following at the end the Employer section around the middle of the Adoption Agreement

                            "Related Employers – If the Adopting Employer is part of a controlled group of corporations (as defined in Code section 414(b) as modified by Code section 415(h)), a group of commonly controlled trades or businesses (as defined in Code section 414(c) as modified by Code section 415(h)) or an affiliated service group (as defined in Code section 414(m)) of which the Adopting Employer is a part, or any other entity required to be aggregated with the Adopting Employer pursuant to Code section 414(o), then all Related Employers of the Adopting Employer will participate in this Plan."

                            If Vanguard has this or similar language, all businesses solely owned by you and/or a spouse by attribution will be a controlled group. Therefore, total net earnings from self-employment (earned income) of the controlled group will be the basis for one-participant 401k contributions.

                            Note: Vanguard's one-participant 401k has two significant deficiencies:
                            • They do not accept rollover contributions.
                            • They do not allow employee eligibility restrictions. This prevents you from excluding employees < age 21 and who work < 1,000/year or three successive years < 500 hours/year. This applies to any child you might want to hire.

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