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M Norton

SIMPLE IRA for 1 of 2 Sch-C spouses

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Barber operates a barber shop as a Sch C.

He has another barber also working in his shop and pays her as contract employee (for past two years).  She has reported her income on her own Sch C, and contributed to her personal IRA.

Barber owner marries barber contract employee, but working arrangement remains the same.

Barber contract employee is considering starting her own SIMPLE IRA for her Sch C.

Can they really maintain two Sch C's when she's working in his shop?  And are there any controlled group issues that would affect a SIMPLE IRA due to attribution?

Thanks!

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23 hours ago, M Norton said:

Barber operates a barber shop as a Sch C.

He has another barber also working in his shop and pays her as contract employee (for past two years).  She has reported her income on her own Sch C, and contributed to her personal IRA.

Barber owner marries barber contract employee, but working arrangement remains the same.

Barber contract employee is considering starting her own SIMPLE IRA for her Sch C.

Can they really maintain two Sch C's when she's working in his shop?  And are there any controlled group issues that would affect a SIMPLE IRA due to attribution?

Thanks!

First, we have to assume that the independent contractor status is valid (and it might be; such operations are normal in that business; often the "contract barber" is renting a chair in the shop and booking her own clients, etc.).  So let's assume it is legit for this example.

Now, they get married.  Yes, the two entities are now a controlled group and let's also assume the spousal exception doesn't apply.

Can they have two Schedule C's seems to be the question.  And the answer is "of course". They have two different businesses; what if she was a self-employed plumber but they got married? Still two different businesses.  You are apparently getting waylaid by the fact that they work in the same physical location, but who cares?  Yes, they are a controlled group, but they are both HCEs and assuming there is no NHCEs in either entity, then there is nothing that stops them from having two separate plans since 401(a)(26) does not apply to defined contribution plans.  As long as there are no discrimination issues due to NHCEs, your situation looks fine to me, but that assumes all our assumptions above are valid.

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14 hours ago, Larry Starr said:

First, we have to assume that the independent contractor status is valid (and it might be; such operations are normal in that business; often the "contract barber" is renting a chair in the shop and booking her own clients, etc.).  So let's assume it is legit for this example.

Generally, It is very difficult for a spouse simply performing work tasks for the other spouse's business to meet the IRS Behavioral Control, Financial Control and Relationship of the Parties requirements to be considered an independent contractor. However, Larry is correct that the barber chair rental and the fact that the revenue goes directly to that individual makes this pretty clear that she is in fact an independent business. I'm convinced she can adopt her own SIMPLE IRA plan.

However, there is an alternative. They could treat both businesses as a single qualified joint venture (QJV), see Schedule C instructions. They elect QJV treatment simply by each spouse filing a Schedule C/SE under the same business. Then they could use the same Simple IRA plan.

With no employees other than owners and optionally spouses. A one-participant 401k gives more options for retirement plan investing. Larger potential employee deferrals (2019 = $19K vs. $13K) and much larger potential employer contributions (25% vs 3%). However, since it is after the SIMPLE IRA 11/2 notice enrollment deadline, I think it might have to wait until 2021.

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