Can I add my fiancee to my solo 401(k) plan if she helps with my independent contractor position but is not an employee?

by Ibolya Balog, CPA | Dec 08, 2016
askacpaiconI'm a full-time hospitalist who works 1/2 of the year at my permanent position, but I am also an independent contractor doing an additional seven to 10 shifts a month. I opened up a business account to keep my personal account separate from what's paid through locums work. Furthermore, I opened up a solo 401(k), which I am funding as the employee and employer. My fiancée isn't an employee of mine, per se, but she helps with getting and scheduling my assignments for me. So I added her to the solo 401(k) account as well, but I'm not sure if I can find her account under "employer contribution," as she doesn't get a check made out for the work she does. Can you please shed any light?

Opening a solo 401(k) account based on your independent contractor income is a good strategy for maximizing the contribution as employer and employee. However, that is only permissible for you alone. The solo 401(k) is only applicable to the self-employed individual who has no employees. Your fiancée should not be covered under your solo 401(k) plan. Since she is not an employee, no “employer” funded retirement contribution may be made on her behalf.
One possibility is to pay your fiancée as a nonemployee for services provided. However, a Form 1099 MISC will have to be filed to report the amount, and she would have to file a return and pay self-employment tax (equivalent to Social Security and Medicare taxes) on the amount. She could then fund a traditional IRA up to the maximum $5,500 limit or the amount of “earned income” she receives.
For example, if she were paid $6,000 for the year, she would owe $918 in self-employment tax, plus state and local income tax on that amount. But no federal income tax would be due if she has no other income, as the $5,500 traditional IRA contribution would offset the income for federal income tax purposes. This option may be beneficial in spite of the taxes incurred as long as your fiancée is in a lower marginal income tax bracket than yours.
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Answered by: Ibolya Balog, CPA, is an associate professor at Cedar Crest College in Allentown, Pa.
The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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