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Small business 401k Spousal contribution

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  • Small business 401k Spousal contribution

    My wife and I own the LLC.. I just added her as an employee to the business.  Im just making sure that Im doing this right.  Can I contribute both an employee and employer portion to her name?   I assume $18k for employee and the employer should be equal to my employer contribution per the IRS formula below?  So if $70k profit.. then $13,468 in each of our name as an employer contribution?
    2015 Business 401k Contribution per IRS calculations

    net profit ncome: $70000

    maximum % contribution: 25%

    profit - SE tax (2.9% + 0.9%) = 70000 - 2660 = $67,340

    $67,340 x 0.2 ( 25% / (100 + 25)) = $13,468

    total contribution to 401k 2015 = 13,468

    I also pay the kids a marginal amount.. probably 1-2k annually each.   Do I need to fill out a W2 or 1099 to their names?   I heard that I do not.. if less than $6k?   Appreciate any thoughts on this...

  • #2
    Good questions.

    1) If your wife gets $20k W2 salary, you can contribute $18k, plus 25% as employer contribution, up to $20k.  Just make sure you've got a good job description for what she does in case IRS comes for an audit.

    2) You might want to have your accountant calculate the solo 401k contribution just in case.  It comes down to about 20% of your net profit.

    3) You don't want to pay your kids unless they are really doing the work.  They are W2 employees, not contractors.  In case of an IRS audit you can have big problems if you can't justify the work they do, so just as with your spouse, having a list of duties is really key (and you also want to keep note of the hours they work).



    Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees


    • #3
      If your wife is an owner of the LLC, she cannot be an employee unless you have incorporated - she is a partner. I didn't check the math, but yes, an employee can contribute + the employer can match (any tax software will do the calculations for you).

      Love the idea of hiring your children. If they have mowing, babysitting, etc. income, they can contribute to a Roth IRA (you can contribute on their behalf) up to the lower of earned income or $5,500. Hiring your kids is a great way to teach them about money and also write off some of the cost of raising them. Help them budget for clothes and extras, for example, and have them pay out of their own earnings. You need a written contract, reasonable hourly pay, and a record of duties handled, just as you would with any employee. LOL, my partner just asked for the record of hours worked for one of a chiropractor client's children and he turned in a record showing 8 hours on every Monday and Tuesday. The kid is in school, so obviously he didn't explain the rules too well in the first place.

      Since you are unincorporated, payment to your children under age 18 are not subject to SS, Medicare, or FUTA taxes, so no need for a 1099 or W2 in that case. They will not owe income taxes as long as they earn less than the standard deduction, which was $6,300 in 2015. Check your state and local laws.
      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


      • #4
        Johanna and Kon.. thank you for your detailed response!  Two questions.   My kids pretty much do the accounting, banking, and paper shredding.   They are ages 8 and 9.   They input the income and expenses in a spreadsheet, deposit through mobile BoA app.   I use one of them a day for 1 hour from Mon-Fri... 5 hours a week x 4 weeks = 20 hours a month.  I give them about $10 a hour.   If audited.. how do I necessarily prove that they did the work for the year?   I only have a written contract with the listed duties and pay as my only defense...  I guess my kids could also demonstrate what they do as well?  2nd question... my wife is a co-owner of the LLC and this is the first time Im hearing that she "can't be an employee" of the business?   We're not incorporated.   Is this true?


        • #5
          Your arrangement with your children sounds reasonable to me. You have the documentation and the pay/duties are fairly appropriate for their ages. Actually, they sound quite responsible for their ages - I'm impressed! Maybe you could hire them for an extra hour a week and have them clean the office space. Unless you were audited and got stuck with a PITA auditor, you should have no problem.

          By definition, partners cannot be employees. I have seen this done incorrectly several times and the IRS doesn't seem to pay attention, but you need to handle her compensation (guaranteed payments or distributions) correctly. Is there a particular reason you have set the business up as a partnership? It would be simpler for compliance if you have a SMLLC as you will be able to file on a schedule C rather than having to file an extra return (form 1065 Partnership Tax Return).

          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087