401k and Roth IRA contributions by employee of Schedule C employer

Submitted by alberto vega on Thu, 2018-12-20 19:56

Husband (H) age 74 still does some consulting work earning about $ 1800 net of expenses in 2018 and reports it on Schedule C.
H married to his Wife (W) age 68. W is listed as an employee in his business, H paid her through Schedule C $ 1,500 salary ( not deducted from the $1,800 net earning reported above.) H set up in prior years two separate solo 401K plans for both him and his wife separately.
1. Can W contribute to a Roth IRA in 2018 for $ 1,500
2. Can W deduct also from her pay about $1,350 and contribute that to her 401k plan. This would leave her net pay check about $ $35.25 net (1500. – 93.00 ss – 21.75 medicare; $0 income tax).
3. Thus can W contribute to both her Roth IRA $1500 and to her 401k $ 1350? Or is her total limited to contribute to her 401k and Roth IRA limited to $ 1,500 (her gross salary) whichever way is split between the Roth IRA and 401k
4. W’s salary of $ 1,500 will then be deducted as payroll expense in H’s Schedule C and will give H net earnings of only $300



Submitted by William Tuttle on Fri, 2018-12-21 00:25

It seems questionable that H had a net profit of $1800 from his services and W receives $1500 for doing exactly what??? that is reasonable and necessary for the consulting revenue. The below is assuming that H & W have no other compnsation. I hope you misspoke. There should not be two one-participant 401k plans for the same business. There should only be one plan with two accounts.

  1. W can contribute $1500 to a Roth IRA only if no pre-tax 401k deferrals are made.
  2. W can deduct up to $1385.25 ($1500 – $114.75) from her pay check. If it is pre-tax deferrals that will reduce her compensation to $114.75 available for a Roth IRA contributions. However, W makes Roth 401k contributions, W can make $1500 in roth contributions.
  3. A pointed out by above, IRA and pre-tax deferrals are limited to the same $1500, but not so for Roth 401k contributions.
  4. Sure, but why not just have H contribute net self-employment earnings of $1673 * 2. If his 2017 year-end balance was $0 he wouldn’t even have to do an RMD before rolling over the Roth 401k to a Roth IRA. Also, by retaining the $1800 business profit, H can receive an $1800 * 20% = $360 QBI deduction if his taxable income allows.

Submitted by David Mertz on Fri, 2018-12-21 13:38

  • If W is an employee, H needs to provide W with a W-2 based on $1,500 of compensation with appropriate income tax, Social Security tax and Medicare tax withholding.  Any elective deferral would need to be to a single 401(k) plan established for both H and W and the maximum amount available for elective deferral to a 401(k) by W would be whatever remains after subtracting the tax withholding.
  • If W is instead an independent contractor contracting to H’s business, these would be affiliated businesses due to family attribution, still requiring H and W to be covered by a single 401(k) plan; they cannot have separate plans.
  • Regarding #2 and 3, assuming that W is an independent contractor and has no other compensation that would put W’s total compensation over the Social Security wage base, W’s maximum elective deferral to the 401(k) would actually be net earnings of $1500 – ($1500 * 0.9235 * 0.153) / 2 = $1394.03.  If $1394.03 is deferred to the 401(k), no net earnings remain to contribute to a Roth IRA.  If W instead makes all 401(k) contributions as Roth contributions, the maximum Roth 401(k) contribution is $1394.03 and the maximum IRA contribution is also $1394.03.
  • With net profit of $300, if H has no other compensation that would put W’s total compensation over the Social Security wage base, H’s net earnings would be $300 – ($300 * 0.9235 * 0.153) / 2 = $278.81 and would be the maximum that H can defer to the 401(k).

Submitted by alberto vega on Sat, 2018-12-22 03:35

The business referred to has on 401k Plan with  H and W the participants. W does secretarial/bbookkeping work for H.Even though business income is low. Total revenues are about $10,000

Add new comment

Log in or register to post comments