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  • Help with Solo 401K tax issue

    I am currently a W-2 physician wage earner and will have side hustle 1099 income of about $30K in 2017. I opened up a solo 401K this year and in January, I contributed $10K to the plan as an EMPLOYER contribution. I fully expected I would be able to earn more 1099 income in 2017, but the side hustle went awry and I’m only going to get about $30K. My $10K contribution has increased in value by about 20% since the start of the year. I have a Profit Sharing Plan with my W-2 job as a practice partner and am planning maxing out 2017 contributions ($18K employee contributions and $36K of Profit Sharing contributions) to the plan by the end of the year (I made partner a few months ago and should get to $270K in eligible income by the end of the year to make this happen). I brought this issue up with my accountant and he said we could declare my side hustle income on W-2 this year of $40K (which I have been paying payroll taxes on) to allow for the $10K of EMPLOYER contributions to the Solo-401K. We’d also declare about $10K of business losses to account for the discrepancy. Does this seem right? Do I need to go back and declare the original EMPLOYER contributions as EMPLOYEE contributions? I think I still have time because I’ve yet to contribute to the Profit Sharing plan this year.


  • #2

    Is your accountant a CPA? I believe that is called filing a fraudulent income tax return. Or you are making an overcontribution to a 401k and purposely not correcting the error even though you are aware of it, which could be found out years later. I bet if your accountant knew that you were going to repeat his suggestion on a public forum, he might have thought twice about giving you that "tip". Or maybe not - I've seen a lot in 38 years...


    I'm not even going to go into all of the issues implied by filing a W2 for $40k on $30k of SE income. Incorporating just to do this is nonsensical in the first place.


     

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

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    • #3

      Johanna, I couldn't agree more. It is one thing for an accountant to recommend an aggressive position for a gray issue. It is something totally different to advise the filing of a fraudulent return with intentional tax evasion. Personally, I think this accountant should be reported to the Office Of Professional Responsibility. There are too many good accountants to be stained by this idiot. First of all, as you know I try to help physicians understand how bad it is to use an S-Corp for moonlighting income. It is bad enough when they do this because of misguided conventional wisdom, but when they receive professional advice to do so, it is malpractice. However in this case, if the OP was self-employed the end result would be catastrophic. This would be considered a willful excess contribution. Under 26 CFR 1.401-13 Excess contributions on behalf of owner-employees, (e) Effect of an excess contribution which is determined to have been willfully made. To paraphrase:



      1. Only this section applies.

      2. All assets in all self-employed plans shall be distributed.

      3. Those distributions shall be subject to all taxes and the penalty on early distribution.

      4. The prohibition of any owner-employee retirement plan for five (5) years.

      Comment


      • #4


        Under 26 CFR 1.401-13 Excess contributions on behalf of owner-employees, (e) Effect of an excess contribution which is determined to have been willfully made. To paraphrase: Only this section applies. All assets in all self-employed plans shall be distributed. Those distributions shall be subject to all taxes and the penalty on early distribution. The prohibition of any owner-employee retirement plan for five (5) years.
        Click to expand...



        Thanks for the cite, perfect. I attempted to research but am embarrassed to admit could not find anything relevant.

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

        Comment


        • #5

          The only reason I know this obscure IRS regulation is because someone once asked me what would be the consequence of an intentional excess employer contribution to a self-employed 401k.


          I told him I thought it was probably a "fraudulent conveyance" before I even checked, but he didn't seem to care, because his bankruptcy lawyer told him to do it.


          The possible disqualification of all of his self-employed 401k assets, massive income tax and penalty bill and a 5 year prohibition on self-employed retirement plans, convinced him otherwise.


           

          Comment


          • #6


            I believe that is called filing a fraudulent income tax return.
            Click to expand...





            Johanna, I couldn’t agree more.
            Click to expand...



            So, besides Jaleta needing a new CPA, how would you address the error of over-contributing to a solo-401k as the employer?  The take away I get is to not make the employer contribution until the end of the year when taxes are done unless you are very conservative in contributing as you go.  


            Jaleta, you could try posting this question over on Bogleheads (without the distraction about what your CPA said) and see what answers you get on how to address the error.  Good luck.  Please update us here. 

            Comment


            • #7

              Thank you for your comments. I am disappointed that I went to my CPA accountant and he advised me to follow this strategy. This is even after I asked him directly whether or not I was over-contributing to the Solo 401K this year, knowing that I would only make about $30K. I obviously have to find a new accountant who deals with Solo 401k’s regularly (and LEGALLY).
              I’ve tried to wrap my head around this and I will bring this strategy up to my new accountant:
              1. I’ve already made federal SE tax payments reflecting $40K in payroll earnings as the accountant previously advised. I’ll somehow want to change this to $15K in payroll (I would like ½ of earnings to go toward salary) and request a refund of these payments somehow from the IRS (via a form 941-x?). I’ll have to do this for my state taxes as well.
              2. I figure that I should therefore only be able to contribute $2788 in EMPLOYER contributions based on adjusted earned income (I'll probably need to be a bit more conservative with this number until I know exactly what my earnings/taxes look like towards the end of the year)
              3. I’ll have to tell my solo-401K provider to recharacterize $7212 (which is $10,000 - $2788) of EMPLOYER contributions to EMPLOYEE contributions.
              4. I have to tell my Profit Sharing Plan administrator at my practice that I can only contribute $10,788 (which is $18,000 - $7212) as EMPLOYEE contributions.
              I’ll post this on the Bogleheads forum as suggested by Dr. Mom and let you know.
              Thanks again!

              Comment


              • #8

                I (maybe Johanna) initially thought your CPA was proposing inflating the S-Corp's income because of the way you worded it; "we could declare my side hustle income on W-2 this year of $40K". You wouldn't be declaring the businesses income of $40K, you would be declaring the S-Corp's income of $30K and a W-2 payroll of $40K.


                I have given you a long detailed response to your subsequent Bogleheads posting. I hope the WCI community does not mind me not replicating the long and tortuous verbiousity here.


                The bottom line is that you have serious S-Corp taxation issues and even more serious one-participant 401k plan errors. Even though I responded to the issues I saw. These are not problems that can be solved on an online forum. This is serious enough that you need more than a CPA. I think you need the professional assistance of a Third Party Administrator (TPA)

                Comment


                • #9


                  I have given you a long detailed response to your subsequent Bogleheads posting. I hope the WCI community does not mind me not replicating the long and tortuous verbiousity here.
                  Click to expand...



                  Would you mind posting a link to your response? I don't frequent BH and would enjoy reading your tortuous verbosity. And I'm too lazy to search   

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

                  Comment


                  • #10





                    I have given you a long detailed response to your subsequent Bogleheads posting. I hope the WCI community does not mind me not replicating the long and tortuous verbiousity here.  
                    Click to expand…



                    Would you mind posting a link to your response? I don’t frequent BH and would enjoy reading your tortuous verbosity. And I’m too lazy to search   
                    Click to expand...



                    https://www.bogleheads.org/forum/viewtopic.php?p=3595155#p3595155  

                    Comment


                    • #11

                      Jaleta- My husband's practice uses a TPA for his 401k.  We are in the Southeast.  PM me if you would like their name.  Thanks for posting this question.  It is my first year with a solo 401k also.  I am trying to learn about pitfalls to avoid.  Sorry for the hassle this is causing you.

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