Schedule C earned income

[Gary]

A client has Sch C earned income of 400k for 2009.

The client's entity is in a state that has community property rights.

The inquiry is even though there is one self employement tax calculation can the income be split between each spouse thus enabling larger pension deduction for the two participants?

Conservatively, I would prefer that the spouse receive W-2 from the entity as an employee for services rendered and then be included.

Or what about having each spouse have a self emploment tax calculation for each of them?

Of course, the spouse would have had to actually earn the income by working for the company.

Curious to get any thoughts on this.

Thanks.

[SoCalActuary]

Produce the partnership agreement that splits the income between the two individuals, and don't forget to file 1065 instead of 1040 Sch C.

If you don't have a partnership, how does the spouse get income attributed?

[masteff]

If you don't have a partnership, how does the spouse get income attributed?

Note the OP's 2nd sentence... community property state (ie: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin). See IRS Pub 334, page 2 and IRS Pub 555 in whole.

But that puts us back to the original question: does community propertly and income law result in the non-participating spouse having the right to accrue a benefit under a DB plan?

Oh, and Gary, see pub 555 for the answer to your SE tax question (it's imposed on the one carrying on the trade or business).

[SoCalActuary]

If you don't have a partnership, how does the spouse get income attributed?

Note the OP's 2nd sentence... community property state (ie: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin). See IRS Pub 334, page 2 and IRS Pub 555 in whole.

But that puts us back to the original question: does community propertly and income law result in the non-participating spouse having the right to accrue a benefit under a DB plan?

Oh, and Gary, see pub 555 for the answer to your SE tax question (it's imposed on the one carrying on the trade or business).

Thanks for the cites on pub 555 and 334. I still hold that the earned income is attributed to the person conducting the business. If you are trying to assert that the earned income is split but the SE tax is not, I see this as inconsistent.

[masteff]

I see this as inconsistent.

Because the IRC is the very model of consistency. (But no, I'm not asserting, please don't infer what I don't state. I very deliberately restated the question at hand to show that it remains unanswered.)

[Mike Preston]

It is not unanswered, SoCal did.

[masteff]

Mike, so are you stating that SoCal's answer was correct despite it failing to address the issue of community property rights? If so, on what basis are community property rights excluded from the scenario? Otherwise the answer would appears to be incomplete.

[Mike Preston]

IRC Section 1402(a)(5). One of my favorite code sections. Drives people nuts.

[SoCalActuary]

Mike, so are you stating that SoCal's answer was correct despite it failing to address the issue of community property rights? If so, on what basis are community property rights excluded from the scenario? Otherwise the answer would appears to be incomplete.

Every pension plan document that I use in private plans has a series of definitions that explain compensation. You either have w-2 pay and its offspring or you have net earned income for the partnership and sole-proprietor employees.

How do you take an allocation of income for 1040 purposes and turn it into one of these two items?

Well, you pay the non-owner spouse a wage with appropriate tax on wages. That is simple to handle.

Or, you make the non-owner spouse an owner (partner) who has SE income, subject to SE taxes.

You don't get to have compensation for pension if you don't make it subject to tax on wages. Otherwise, you are just trying to have a tax dodge.