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Can I start a solo-401k in addition to my partnership's K1/401k?

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  • Can I start a solo-401k in addition to my partnership's K1/401k?

    I'm new to the WCI forum. You guys are amazing. I just started a new job and open an S-corp for the first time. I would love you guys' input to my situation

     

    The situation:

    1. My salary is distributed as K1, and is estimated to 425k this yr. The K1 pays my S-corp ( a professional corporation with no other employee besides myself).

    2. The company also offered 401k, which is deducted from my K1 salary to my S-corp monthly. Because of the flexibility of K1, the company allows me to max out the traditional 401k (54000$ this year) as employer distribution.

     

    The questions.

    1. I  hope to maximize saving of Medicare tax, but don't' want to risk an audit. What would a reasonable salary to give myself as W2 this year (so I can take the rest as distribution and save on Medicare tax)?

    2. Can I start a solo-401k with my S-corp, and contribute to it as employer contribution, with my W2 income?

     

    Really looking forward to your advice.

     

    Sincerely,

    Josh

     

     

     

  • #2
    Josh,  you should pay yourself a W2 income equivalent to what it would cost on the open market (what would you pay to have someone do the job instead of you).

     

    As to having two plans-only if you have two separate work tasks in some way.  For instance, if you provided direct patient care for part of your income and did some administrative work for another part.  But having all the source income from one payor makes that very hard to prove.  In any event, if you did have another source of income from another "job," you could have a second plan, but note that the salary deferral allowance of 18K (or 24K depending on age) is aggregated over all plans.

    Comment


    • #3

      1. The IRS standard for s-corp owner salaries is to pay yourself a reasonable salary, as Steven said. However, the IRS "rule of thumb" is that you need to pay yourself a salary at least equal to the distributions you take from the business. So, let's say you are distributing all income after expenses and other expenses besides your salary are $25k. Then you would need to have a salary of at least $200k to match the $200k in distributions.

      2. If I am understanding the fact pattern correctly, your S-corp is a member of a larger collective of S-corps, possibly with a separate, related entity that has additional employees, pays the overhead for the group of S-corps, etc. Given the fact that you already have a 401k with the group that you have ownership in and are providing services for, what you are describing is a complex situation that may be better served with specific, personal advice.


      Looking for @spiritrider to let us all know if this (#2) makes sense...
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

      Comment


      • #4

        1. The 50% + $1 "rule" is just a generally accepted minimum ratio of compensation. This is based on IRS guidance that if the majority of your income is from personal services, then most of your income should be taken as compensation. However, all of the recent tax and appellate court rulings have focused on comparative salaries. You should start with and have some documentation of the average salary for your discipline in your geographic region. Then refer to IRS guidance if you want to modify this.

        2. No, your S-Corp may not adopt its own employer retirement plan. The partnership is a First Services Organization (FSO), the S-Corp is a partner in the FSO and is "regularly associated with the FSO in performing services for third parties". This makes it an Affiliated Service Group.

        Comment


        • #5
          Thank you so very much

          I forgot to mention that I have an additional Locum job with a separate company, which pays to the same s Corp as 1099. It’s would be only about 40k this year

          Would I be able to start a solo 401k, and contribute part of that income into it ? How much would the possible maximum be ?

          Comment


          • #6


            I forgot to mention that I have an additional Locum job with a separate company, which pays to the same s Corp as 1099. It’s would be only about 40k this year Would I be able to start a solo 401k, and contribute part of that income into it ? How much would the possible maximum be ?
            Click to expand...


            See #2 from @spiritrider.
            Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

            Comment


            • #7
              Josh, an intriguing question with more than one answer:

               

              As Johanna and spiritrider note, if you pool the income from both jobs into one S corp, you can only have one retirement plan.  BUT, if you have the locums company pay a separate entity (a sole proprietorship or LLC for example), then you CAN have another plan.  Since you max out salary deferral in the first plan, you cannot do more salary deferral in the second plan.  But you can do profit sharing (roughly 19% of net income-see other notes by spiritrider on this calculation).  I'd recommend a SEP IRA for the second income-no tax reporting, no cost, can do year by year.

              Comment


              • #8




                1. The 50% + $1 “rule” is just a generally accepted minimum ratio of compensation. This is based on IRS guidance that if the majority of your income is from personal services, then most of your income should be taken as compensation. However, all of the recent tax and appellate court rulings have focused on comparative salaries. You should start with and have some documentation of the average salary for your discipline in your geographic region. Then refer to IRS guidance if you want to modify this.

                2. No, your S-Corp may not adopt its own employer retirement plan. The partnership is a First Services Organization (FSO), the S-Corp is a partner in the FSO and is “regularly associated with the FSO in performing services for third parties”. This makes it an Affiliated Service Group.


                Click to expand...


                While this is an affiliated service group, in this case he can't open a 2nd plan because the adopting employer (partnership) already has a plan in place.  He's just a partner, and not the employer, only the employer can adopt a plan.  Technically, with an affiliated service group (if he owned his business 100% for example) you can have a 2nd plan, however, both plans would have a single limit.  In this case he can't even have a plan that's different from the partnership's plan.
                Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                Comment


                • #9
                  I will respectively disagree.  If the locums income is unrelated to the primary job, AND the income is paid to a separate entity-Josh can have a second plan in place (although salary deferral from both plans cannot exceed the usual age related limits).

                  Comment


                  • #10




                    I will respectively disagree.  If the locums income is unrelated to the primary job, AND the income is paid to a separate entity-Josh can have a second plan in place (although salary deferral from both plans cannot exceed the usual age related limits).
                    Click to expand...


                    I was talking about having a 2nd plan for the partnership entity, this was more of a technical comment on spiritrider's reply.

                    EDIT: I'm not sure at this point about solo 401k for 1099 income.  The problem is whether there is a controlled group between the S corp and solo proprietorship.  I have to think about that one.
                    Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                    Comment


                    • #11
                      It sounds like I've made a technical mistake by consolidating all my income (1099 from locum job and k1 from my main job) into my S-corp's checking account.

                      Thank you so much for all your input and discussion, which is making me think, and lead to more questions.

                      1. Since's my company is started in April 2017 and hasn't file for tax yet. Could I move my 1099 income into my personal checking, then file the 1099 income as a sole proprietorship?

                       

                      2. Would you elaborate the reason why I couldn't establish a solo-401k as a sole proprietorship with my separate 1099 income? Based on this article, it seems that I can. https://www.whitecoatinvestor.com/multiple-401k-rules/

                      https://www.whitecoatinvestor.com/multiple-401k-rules/

                      My K1's 401k allows me to put 100% of the salary deferral as  Employer Contributions. I really want to take advantage of the 18k employee's contribution with a separate solo 401k.

                       

                      3. If I can't open a solo 401k, then I must open a SEP IRA, and contribute to it with my 1099 income. Does that mean I can't use the backdoor Roth IRA, because of the pro-rata rule?

                       

                      4. Am I allowed to roll over SEP IRA to my K1's 401K yearly, then use the backdoor Roth IRA at the end of the year?

                       

                      I'm learning so much.  Thank you once again for taking your time

                      Comment


                      • #12
                        As far as what you can do with splitting/consolidating income, I would talk to a good CPA regarding that. Unless your 1099 income is paid to your S corp, I believe you can do whatever you want with it.  So if it is just commingled together, then you can take that money out, but again, talking with a CPA should be a priority.

                        If the company is the employer (regardless of whether you have your own S corp), this does not seem like you have a controlled group going on, so I believe that you can do a solo 401k for your 1099 income.  So I believe that you get another $54k limit with your solo 401k plan.

                        Again, this is tricky because if you had an S corp that you owned 100% of, and you got income via that S corp, you wouldn't get another $54k limit for your 1099 income, but because the employer in this case is the partnership, you do.
                        Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                        Comment

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