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  • Pay spouse

    I have 1099 income as an independent contractor. I am interested in paying my wife for services and having her contribute directly to her own solo 401k. For example, I would document actually hours worked and issue 1099 for 18k of work and she could put all of this directly into her own solo 401k. This income would be deducted from my contractor income and would be tax free to her due to all of it going into her solo 401k. Any issues with this?

  • #2
    For what services?

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    • #3
      I think you would have to consider her as an employee, paying all the regular taxes FICA, and so on. You might have to register with your state for WC and unemployment funds. Her additional taxes and you companies portion of the taxes may make it a wash economically.

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      • #4
        Spouse does accounting, reviews contracts, organizes and provided documents, etc. Spouse would not be an employee per irs.gov documents. Spouse dictates hours, paid a flat fee per job, no regular hours, etc.

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        • #5
          I've run the numbers on this situation before.

          If your spouse is currently not making the $19,500 salary deferral anywhere else and is making it to hers/yours 401(k) plan, the income tax deferral exceeds the extra payroll taxes.

          But if all your spouse is contributing is the 25% profit-sharing then the extra payroll taxes are more than the income tax deferred.

          And you'd need to pay your spouse around $21,500 to have enough net pay to contribute $19,500 as salary deferral.

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          • #6
            If you make over $142,000 a year you will pay more taxes on the same amount of money earned because of the cap on SS taxes.

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            • #7
              How much work are we actually talking here? Have to pay her a normal wage. 1099 contractors don't usually have a huge amount of books to do accounting for..

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              • #8
                Originally posted by DavidGlennCPA View Post
                I've run the numbers on this situation before.

                But if all your spouse is contributing is the 25% profit-sharing then the extra payroll taxes are more than the income tax deferred.

                And you'd need to pay your spouse around $21,500 to have enough net pay
                this is only true if w2 right? If spouse is 1099 then there wouldn’t be payroll taxes. If spouse income was say 5k, couldn’t that entire amount go into solo 401k?

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                • #9
                  If your spouse is a 1099 then she would responsible for all the taxes herself

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                  • #10
                    Originally posted by milphys View Post

                    this is only true if w2 right? If spouse is 1099 then there wouldn’t be payroll taxes. If spouse income was say 5k, couldn’t that entire amount go into solo 401k?
                    No. You have to reduce the 1099 income by 1/2 of SE tax before calculating the contribution.

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                    • #11
                      Is your wife going to get paid by you or another entity , ie hospital?

                      If you get paid as a 1099 , then you are responsible for your own self employment taxes. If you then pay your wife , you could claim her as a business expense , but then she would be responsible for her own self employment taxes, fica, wc,ue , ss , and state separately which may negate the value of doing this , especially if you make over 142k a year

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                      • #12
                        Don't know if your state allows professional LLC. hires both you and wife and business expensed salaries that way and company 401k. Makes bookeeping more streamlined if allowable.

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                        • #13
                          Originally posted by milphys View Post
                          this is only true if w2 right? If spouse is 1099 then there wouldn’t be payroll taxes. If spouse income was say 5k, couldn’t that entire amount go into solo 401k?
                          It is almost never proper to classify a direct family member as an independent contractor (IC). It is rare they can meet the IRS Behavioral Control, Financial Control and Relationship of the Parties requirements to be classified as an independent contractor.

                          Given the facts and circumstances you presented. Your wife would be 100% an employee. Any attempt to pay her on a 1099 would be a misclassification.

                          As pointed out, it seldom makes sense to hire a spouse to just be able to make retirement contributions if it involves paying an extra 12.4% in FICA taxes. You would be far better off making tax efficient taxable investments.

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