Adding spouse to Solo 401k

[vtiinvestor]

Here is a breakdown of my information. I live in a non-community property state, file as a sole proprietor and over the wage base limit for social security taxes.

My W2 income (125,000)
My 1099 income after expenses (330,000)
My 1099 Solo 401k traditional employer (58,000)

My plan was to allocate 10% of the business to my spouse ($33,000) and elect as a Qualified Joint Venture . This allows my spouse to contribute 19,500 employee deferral solo 401k and also maximize the employer contribution %. My spouse does not have another job and will have to pay the additional FICA tax.

- I am close to the taxable income threshold of the reduced phase in for the Qualified Business Income deduction ($329,800). Does it make sense to file as a Qualified Joint Venture and shelter some of the taxable income via my spouse's employee contribution?

- Are there any downsides to filing as a Qualified Joint Venture? For example does it make our tax return too complicated to split expenses (90%/10% split) like Home Office Deductions?

- Do I have to add my spouse to the solo 401k before the end of the year for the contributions to be eligible? My spouse would be making the written declaration of the employee contribution this year so it can be contributed in 2022 before the tax deadline.

Thanks in advance

[spiritrider]

I don't see anything in your post about a legitimate business need that your spouse would fulfill. You can't just allocate income to a spouse for a tax benefit. Not to mention, in order to file as a Qualified Joint Venture, she must be a "material participant" in performing business necessary tasks.

• Sure, if she is performing business necessary task and this is not just for tax sheltering purposes.
• A QJV is relatively simple to file. Each spouse will file a separate Schedule C and Schedule SE. All business income and all business expenses will be allocated proportionally.
• It is the 401k plan that must be adapted by 12/31 to make employee deferrals. Effective with the 2020 tax year, an employer has until the tax filing deadline including extensions to adopt a 401k and make employer contributions. As you noted, if you have a current 401k plan or one adopted by 12/31, each participant must have an employee deferral election on file with the plan by 12/31 to make employee deferrals for that tax year.

[jfoxcpacfp]

Paying a 12.4% front-end load just to contribute to a solo-k just doesn’t make sense to me. What would she do as a business owner?

[jacoavlu]

Paying a 12.4% front-end load just to contribute to a solo-k just doesn’t make sense to me. What would she do as a business owner?

sometimes it can be worth it depending on spouse past working career and accumulated social security credits

of course spouse should have true material participation in the endeavor

[jacoavlu]

sometimes it can be worth it depending on spouse past working career and accumulated social security credits

of course spouse should have true material participation in the endeavor

of course this doesn’t have anything to do with the 401k. it’s the fact that allocating income to spouse and paying that SS tax might be worth it if doing so helps spouse that otherwise wouldn’t, get to 40 lifetime credits

[jfoxcpacfp]

sometimes it can be worth it depending on spouse past working career and accumulated social security credits

of course spouse should have true material participation in the endeavor

I would agree with you if spouse were not married to a physician or other high income earner. If a spouse needs help to get to 40 credits, unlikely s/he w/b claiming SS on his/her own record.

[jacoavlu]

I would agree with you if spouse were not married to a physician or other high income earner. If a spouse needs help to get to 40 credits, unlikely s/he w/b claiming SS on his/her own record.

i’m no expert on all the ramifications of SS credits but pretty sure it affects medicare eligibility, which could be a big deal

[jfoxcpacfp]

i’m no expert on all the ramifications of SS credits but pretty sure it affects medicare eligibility, which could be a big deal

That is a good point and exactly right.

[vtiinvestor]

Thank You for the responses. Here is my reply with some more information.

- Eligibility for Qualified Joint Venture

My spouse does the bookkeeping, invoicing, scheduling activities for the business. This is the activity that she does exclusively for the business (>100 hours). She also does some of the project work for clients (>500 hours).

- Reason for thinking about the Qualified Joint Venture.

My spouse will definitely have a much larger spousal security benefit, due to my high income. I am estimating more profits from my business next year and will be in the phase in threshold. I am not sure if it make sense to elect as a Qualified Joint venture to try to stay below the threshold or is the benefit negligible and I am making it unnecessarily complicated. I agree with jfoxcpacfp that it does not make sense to pay the additional 12.4% Fica tax. I would not consider this if not for the Qualified Business Income deduction.

Thank You for taking the time to respond to post. I appreciate your very helpful advice.

[DAK]

Given bona-fide contribution to the business, the additional FICA tax is 12.4% Soc Sec + 2.9% medicare on "wages". However, you can then allocate some profit-sharing employER contribution to spouse's pre-tax solo 401k. I'm not sure on the rules for partnerships, but but I think it's something like 20% of net profits (after half of SE-tax).

However, could you pay your spouse wages on a W-2 instead? I think (but don't know) that they would still be eligible for the same solo 401k because you are treated as common ownership.

Then you could make an employer profit-sharing match of up to 25% of their wages (again, not certain on this, just brainstorming but that's what it is for S-corp owner wages)

So if the 20.5k next year represents that spouse's wages, you could in theory contribute another 5,125 as employer pre-tax profit sharing to the solo 401k. Obviously you'll want to verify this. But that drops the 15.3% SE-FICA tax to an effective 12.24% FICA (and removes 20.5K + 5,125+ 7.65%*20.5K = 27.2K from taxable income of which ~3100 is FICA-taxes)

Just brainstorming...in case this gets you under the QBI phase-out it could have a bigger tax impact than 3K in incremental FICA taxes, although my understanding of the phase-out is that it is more gradual than that.

[spiritrider]

The maximum employer contribution is always 25% of compensation. A self-employed individual's employer contribution may be calculated as 20% self-employed earned income, but it is still 25% of compensation. It's just a calculation efficiency.

W-2 employee: $100K W-2 wages, $25K employer contribution = Self-employed individual: earned income $125K, $25K employer contribution.