IRA and 401K contributions deduction year 2021 for S corp owner
H and W each under 50, married in 2021 each own separate S corporations in 2021 and earlier years.
Only one shareholder, the owner, in each S corp. The S corps were started by each 5 years ago when they were single.
H S corp paid in 2021 to him $ 10,000 salary; net income $40,000 after deducting salary
W, a dentist, S corp paid her in 2021 $100,000 salary; net income $250,000 after deducting salary
No qualified benefit plans for each . No employees for each
1. Can each set up a deductible traditional IRA and how much can each deduct and contribute in 2021.
2. Can each set up instead, a Roth IRA and how much can each deduct and contribute in 2021
3. Can each set up additionally a solo 401K separately and how much can each contribute and deduct.
4. Are the IRA limit of $6,000 for each and 401k $ 19,500 apply separately for each OR the maximum
contribution to both IRA and 401k is only $ 19,500 for each.
5. If thee is a delay to make the IRA contributions for 2021 until April 1, 2022 do they have to open the
IRA’s and 401K before 12/31/2021.
6. Do they have to make the 401k contributions before 12/31/21
Permalink Submitted by William Tuttle on Mon, 2021-12-13 00:02
An S-Corp 2% shareholder-employee is required to be paid a “reasonable compensation”. In both cases your salaries are unreasonably low. You can not pay yourself unreasonably low salaries to evade FICA taxes. If audited, you would be forced to pay the FICA taxes avoided and a 100% penalty of that amount. Not to mention, if you were paying reasonable salaries, the S-Corps are probably counter-productive.
I direct you to: S Corporation Compensation and Medical Insurance Issues
https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues
“But to the extent gross receipts are generated by the shareholder’s personal services, then payments to the shareholder-employee should be classified as wages that are subject to employment taxes.”
Yes, but… There is a traditional IRA deduction income limit if one or both are active participants in an employer retirement plan. For 2021 traditional IRA deductions are fully phased out at $124K of MFJ IRA MAGI for active participants. Your income is to high for either one of you to deduct traditional IRA contributions while also contributing to a one-participant 401k.
Same problem different limit. 2021 direct Roth IRA contributions are fully phased out at $208K of MFJ Roth MAGI. You could do the so-called Backdoor Roth, but Biden/Democracts proposed BBB eliminates this ability after 12/31/21. So, you would have to hurry and this is only tax efficient if you have no pre-tax balances in all traditional, SEP and SIMPLE IRA accounts.
Yes, but… If you have a minor child together, you would be considered a Controlled Group by family attribution. The tax code and the IRS consider a Controlled group to be one employer for employer retirement plan purposes. You could still both make 401k contributions, but it would to be a single one-participant 401k plan with two 401k accounts. Your respective contributions:
You could each make an employee deferral of up to 100% of compensation, not to exceeded the employee deferral limit (2021 = $19.5K
Each S-Corp could make an employer contribution up to 25% of compensation, not to exceed the (employee + employer) annual addition limit. This limit is the lessor of 100% of compensation or the statuatory limit (2021 = $58K).
The IRA and 401k limits are separate, but subject to the same compensation. If H has $10K in W-2 wages and makes a $10K traditional pre-tax employee deferral they would have no IRA compensation to make IRA contributions. H would need W-2 wage of $19.5K + $6K = $25.5K to make $19.5K pre-tax 401k employee deferrals and $6K in IRA contributions. However, Roth 401k contributions do not reduce IRA compensation.
You can open an IRA and make contributions on the same day. The deadline for the 2021 tax year is 04/18/21. However, as I already pointed out you can not make traditional or direct Roth IRA contributions. If the BBB passes and is signed into law eliminating the Backdoor Roth after 12/31/21, the non-traditional IRA contributions and Roth conversions would have to be completed by 12/31/21.
In order to make employee deferrals for the 2021 tax year. The one-participant 401k would have to be adopted and each spouse would have to complete an election deferral election by 12/31/21. Also, the elective deferrals would have to be deducted from compensation not already received with a pay date no later than 12/31/21. The S-Corp would have until the S-Corp’s tax filing deadline (03/15/22) including extensions (09/15/22).
Permalink Submitted by alberto vega on Mon, 2021-12-13 22:20
1.Seems the traditional IRA and Roth IRA contributions could not be made to get deductions because of the high income of Wife. And even more income when filing jointly and H income is added2. Therefore seems best is to do a solo 401k for wife and a solo 401k for husband if his salary is $10,000. If Husband salary is $ 20,000 the solo 401k would absorb all of it. Have not received yet final salary of S corp salary and net for H. Wife’s salary and net income of S is pretty accurate. Solo 401k needs to be open for both before 12/31/21 but contributions could be made before 4/18/22?3. They do not have children at all4. In summary each can contribute $ 19,500 to a solo 401K for each if H will have enough Salary?5. Presume the portion of net income that is not salary; 250K for her 40K for him can not be used for other benefit plan contributions6. How much in $ can the company matching contribution for the 401k be for each and when would the company have to pay it. IF W 100,000 salary then it is $25,000; if H salary $ 10,000 then $2,500. If wife would have a deduction from salary of $ !9,500 and husband of $ 10,000 ;then total is W 19500+25000. And H total 10000+25007. In your reply for item 3 without a minor child; then still they should have one 401k plan with two participants H and W. I thought the separte S corps for each H and W requires separate solo 401k plans for each?