Spouse of Self-employed individual

[Gary]

Say a self-employed individual files a Schedule C on his 1040 and sponsors a DBPP.

We know that the salaries and pension expense for his employees (not counting the owner/employee) are deductions on the Schedule C and the remaining net earned income flows to the 1040 and then any pension deduction for the owner/employee is taken from the earned income that flowed through to the 1040 and shows as a qualified plan deduction on his 1040 on behalf of himself.

The questions is, can his spouse in this case be considered a Schedule C employee where her salary and pension contribution is a deduction on the Schedule C or does she have to have her pension deduction from the earned income that flowed through to the owner(and spouse)/employee's 1040?

Thanks.

[SoCalActuary]

Either the spouse is an employee (w-2 wages, deduction on 1040 schedule C for pension),

or the spouse is a partner (should have 1065 return and K-1's)

or the spouse is not an eligible participant.

How would you determine spouse's earned income? Is it a formula on the total net income,

or a guaranteed payment in a partnership? or wages?

I do not find any authority to arbitrarily divide the Sch C income between the spouses,

just so you can maximize the pension deduction.

I look forward to dissenting opinions, but this is the approach I hear from knowledgable tax preparers.

[JAY21]

I would agree with SoCal. If an employee need w-2 wages, FICA taxes paid, and then take her deduction on the Schedule C like any other non-owner employee. I also don't see her being an Co-Owner of a Sole Proprietorship. If it was an LLC or partnership then she could be a part owner and have earned income.

[SRM]

I agree that the proper treatment is either an employee on a W-2 or partners with K-1s and an 1065 return.

However, what if there were two sponsoring employers - one for each schedule c business? If we assume that the spouses have truly separate businesses, then couldn't a single Plan be adopted and sponsored by each of the schedule c businesses (i.e. 1 plan with a sponsor and a supplemental participation agreement for the other sponsor)?

[SoCalActuary]

SRM - yes, your change in the scenario would work. This assumes that Gary's client has two separate businesses with their own Sch C incomes to report.

However, my intuition says he has one Sch C, and is looking for ways to juice up the current contribution.

[SteveH]

I am sorry this thread is a little old, but why not just add the spouse the the payroll? What is the advantage of trying to carve out her own Schedule C income? I am not seeing where there is a tax advantage by trying to avoid paying her with a W-2.

Maybe if there is a lot of money involved (over the taxable wage base) that both spouses will be over. Taking that into consideration with a DB plan, if there is that much money here, I would be surprised that the client is still a Sole Prop.

What am i missing?