Individual 401k questions

[MichaelB]

I'm considering some extra work on the side (clinical research) which would be 1099 income. I would start a separate corporation for this. If I'm maxing out my 401k/PS at $53k through my practice, would I still be able to start an Individual 401k with the 1099 income?

Also, I'm considering hiring my wife and opening one for her also. What is the best way to structure this to max out an account for her, and what type of account would she have?

Finally, can you contribute all of your income to a 401k, up to the contribution limits, thus eliminating all tax liability on that income?

[RandomERdoc]

By starting a separate corporation, I assume you mean an LLC?

Yes, you can start an individual/solo 401k due to your 1099 income.  You would not be able to make elective deferrals since you are limited to $18000 of elective deferrals across all your 401k accounts per year.  You can make employer contributions, which are limited to 25% of compensation (which is defined as your net earnings from self-employment minus one-half of your self-employment tax, to a max of $54000.  This calculation in effect limits your ability to contribute all of you income to your solo 401k.

Regarding your wife, the setup is similar.  If she doesn't have any other 401k, she can make up $18000 in elective deferrals, this is the most advantageous component.  She can also make employer contributions, but there where it gets more complicated.  I'll leave that portion for someone more knowledgable than me for comment.

[spiritrider]

The maximum employer contribution is 25% of compensation, but is calculated differently for S-Corp and self-employment. It is either 25% of an S-Corp's shareholder-employee's W-2 Box 1 compensation or 20% of the net self-employment income (net business profit - 1/2 SE tax.

An S-Corp is usually counter-productive for a physician with moonlighting income. They will actually pay more FICA than they would SE tax in self-employment.

Discounting liability issues, the simplest option for a couple is a "qualified joint venture". Reference the instructions for Schedule C. This is only available for sole proprietors.

[MichaelB]

RandomERdoc wrote:

By starting a separate corporation, I assume you mean an LLC?

Yes, you can start an individual/solo 401k due to your 1099 income.  You would not be able to make elective deferrals since you are limited to $18000 of elective deferrals across all your 401k accounts per year.  You can make employer contributions, which are limited to 25% of compensation (which is defined as your net earnings from self-employment minus one-half of your self-employment tax, to a max of $54000.  This calculation in effect limits your ability to contribute all of you income to your solo 401k.

Regarding your wife, the setup is similar.  If she doesn’t have any other 401k, she can make up $18000 in elective deferrals, this is the most advantageous component.  She can also make employer contributions, but there where it gets more complicated.  I’ll leave that portion for someone more knowledgable than me for comment.

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Yes, I would set up an LLC. So, if I'm already contributing $54k to my 401k/PS through my practice, I can't contribute more to a solo 401k for myself, but we could contribute $18k for my wife? Is that correct?

[Hawkeye225]

spiritrider wrote:

The maximum employer contribution is 25% of compensation, but is calculated differently for S-Corp and self-employment. It is either 25% of an S-Corp’s shareholder-employee’s W-2 Box 1 compensation or 20% of the net self-employment income (net business profit – 1/2 SE tax.

An S-Corp is usually counter-productive for a physician with moonlighting income. They will actually pay more FICA than they would SE tax in self-employment.

Discounting liability issues, the simplest option for a couple is a “qualified joint venture”. Reference the instructions for Schedule C. This is only available for sole proprietors.

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Wouldn't that depend on how much income is brought in and how the compensation and distribution is structured?  For example, if one is making 80k moonlighting and took 50% compensation and 50% distribution, only 50% has FICA tax (thus would save $6120 in FICA $40,000 x 15.3%).  Of course, there are additional expenses for a corp such as corporate tax return, filing with state, etc.

[RandomERdoc]

You can contribute the employer portion to your solo 401k, which is either 25% of an S-Corp’s shareholder-employee’s W-2 Box 1 compensation, or if you are an LLC or sole proprietor, 20% of the net self-employment income (net business profit – 1/2 SE tax) as pointed out by spiritrider.

[Hawkeye225]

RandomERdoc wrote:

You can contribute the employer portion to your solo 401k, which is either 25% of an S-Corp’s shareholder-employee’s W-2 Box 1 compensation, or if you are an LLC or sole proprietor, 20% of the net self-employment income (net business profit – 1/2 SE tax) as pointed out by spiritrider.

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Random...My question was in reference to this comment:  "An S-Corp is usually counter-productive for a physician with moonlighting income. They will actually pay more FICA than they would SE tax in self-employment."

Any additional thoughts?  Thanks.

[spiritrider]

An S-Corp is counter productive on FICA taxes on moonlighting income when the primary W-2 compensation is > Social Security (SS) maximum wages base (2017 = $127,200).

This is because of intersecting issues. All employers must deduct the SS component of FICA up to the max wage base and only the Medicare component after that. This is still true of an S-Corp. While the employee share of excess SS FICA taxes is recoverable on your Form 1040, the employer share is not. On the other hand, a sole proprietor's Schedule SE takes into account any SS earnings on W-2 compensation. Let's look at an example of a physician with $150K W-2 employment and $100K net business income exclusive of employee costs.

As a sole proprietor, the SE tax will be $100,000 * 0.9235 * 0.029 = $2,678. Only the 2.9% Medicare tax is applied, not the 12.4% SS tax, because the SS max wage base has been reached at the W-2 employer;

Assume the S-Corp pays $50,000 (1/2 of $100,000) in W-2 compensation. The employee/employer shares of FICA will be $50,000 * 0.153 = $7,650. The employee share of the SS tax $50,000 * 0.062 = $3,100 can be refunded on your Form 1040. This leaves the net S-Corp FICA = $7,650 - $3,100 = $4,550.

The S-Corp cost you $4,550 - $2,678 = $1,872 more in FICA than a sole proprietor would. Also, you would only have $50,000 to base your solo 401k contributions on instead of the $98,661 as a sole proprietor.

An S-Corp is preferred for most physicians if that is their only source of compensation, but with moonlighting income it is counter productive on FICA taxes.