S corp solo 401k help

[mhcpa1964]

Hello all. Hope you're doing well.

Client is a 1 owner S corp with no employees. Had better than usual revenues in 2020 so he opened a solo 401k in his business' name. His company did NOT compensate him.

His wife has a Schedule C LLC with no revenues over the last few years. She too opened a solo 401k in her business' name.

EDIT: THE WIFE HAS WORKED IN HER HUSBAND'S BUSINESS FOR YEARS WHICH IS WHY SHE HAS ABANDONED HER SOLE PROPRIETORSHIP.

There were many misunderstandings between the financial advisor and the taxpayer and the result is improper accounts were opened.

I prepared after the fact compensation so the husband meets the 401k criteria. For the wife to contribute, I added her as a 50% owner of her husband's business and planned on paying her a salary too. This seems okay. Yes I and the taxpayer client know this is very tardy.

In the meantime, the wife's 401k is still named in her business which isn't proper. I've pushed the financial advisor to change the account name citing errors and misunderstandings about the taxpayer's business formation. So far they say they aren't able to that.

So what if the husband makes the wife's LLC the 50% owner of the husband's business. The husband's business can make distribution to the wife's LLC and that's all that would need to be done on her end.

Any suggestions and comments are welcome. Enjoy you day.

[New York Enrolled Agent]

The fact that the wife apparently did not work in the husband’s business didn’t stop you from giving her a salary. Is that good tax planning or something more sinister?

[mhcpa1964]

The wife works alongside her husband at his business and has pretty much abandoned her former business. I don't feel anything sinister is going on. They are just not smart and I wasn't aware of the 401k until last week. Client procrastinates, speaks in vague terms and thinks profit distributions are compensation.

But thanks for chiming in.

[TaxGuyBill]

Client is a 1 owner S corp with no employees.

His company did NOT compensate him.

I prepared after the fact compensation so the husband meets the 401k criteria.

For the wife to contribute, I added her as a 50% owner of her husband's business

and planned on paying her a salary too.

The owner is an employee, so the corporation has at least one employee.

If he received money from the corporation, the company DID compensate him because wages/compensation is not optional. The corporation just failed to file payroll returns.

You need to prepare the compensation based on what he received as "reasonable compensation", not based on qualifying for some tax benefit.

YOU can't add the wife as a owner. Only the corporation and wife can do that, possibly with the assistance of a business lawyer.

As was mentioned by NYEA, why is the corporation paying a salary to somebody that is not an employee of the corporation?


I think I recently read a Tax Court case that had some similarities to this ... and if I remember correctly, the tax preparer went to jail for his part in it.

[mhcpa1964]

Thanks gang. The wife works with her husband in his business. Why do you still feel the wife isn't an employee?

[TaxGuyBill]

Thanks gang. The wife works with her husband in his business. Why do you still feel the wife isn't an employee?

Because you told us there were no employees. And you can't be changing things after-the-fact.

Client is a 1 owner S corp with no employees.

[mhcpa1964]

Thanks. I see that now. Appreciate your assistance. Take care