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401k Contributions Guidance for Two-Member LLC


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We established an LLC at the beginning of this year, with just two members – my spouse and myself. We reside in a community property state and file our taxes jointly as a married couple.

Throughout this year, we've utilized our LLC to carry out business activities. My spouse has been working on a separate project, having earned about $1k, while I undertook contract work in the IT field, earning roughly $200k.

Both of us were actively involved in the LLC's operations, each contributing more than 500 hours of work (met material participation test). However, we've encountered conflicting information regarding the tax filing status for our LLC and contributions to our 401k plans. 

Can we both contribute to the maximum allowable amount for our 401k plans, which is $66k each, or is my spouse only allowed to contribute $1k, reflecting their earned income?

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The employer contribution limit for a calendar year plan for 2023 for each individual is the lesser of:

A) 100% of Compensation, or

B) $66,000.

The overall deduction limit for employer contributions is 25% of Compensation (exclude Compensation over $330,000 in 2023).

Compensation is defined in your plan document, but if the business is taxed as a sole proprietorship, then the term Compensation is the net earned income from self-employment (NESE), which is a simple circular calculation.

For example, if your spouse is self-employed and has $1,000 on line 31 of her Form 1040 Schedule C, then you subtract 1/2 of the 164(f) deduction (normally that would be a subtraction of $1,000 x .9235 x .0765), then you subtract your spouse’s employer contribution to the plan to get your spouse’s NESE. That NESE is the limit under section 415 for the total allocation your spouse can have under the plan, excluding any catchup deferrals.

401(k) salary deferrals, other than catch-ups, are also included as counting toward that limit. Keep in mind, deferrals can only be withheld from Compensation, so if your spouse only has $1,000 of income, then the 401(k) deferral and any catchup deferral for you spouse has to limited to fit under the Compensation limit.

Just a reminder: once you have the NESE you yourself and your spouse, to multiply that by 25% since that gives you the maximum deductible contribution that the company can contribute for the year.

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To clarify, you are using a single LLC which covers different business activities? I am guessing it is taxed as a partnership.

How much each of you can contribute depends on how the income flows through the entity. In theory that is governed by some kind of agreement; in reality I'm guessing you haven't thought about it. If the agreement, formal or not, means that your wife shows $1000 of income, then that is all she can contribute as a deferral (401(k)). If you can direct some of your own income to her, then she could contribute more. I'm not saying that is ok to do if she has no involvement in your side of the business.

Partnership accounting can be horribly complicated. Do you have an accountant?

Ed Snyder

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On 9/23/2023 at 9:29 AM, Bird said:

If you can direct some of your own income to her, then she could contribute more. I'm not saying that is ok to do if she has no involvement in your side of the business.

The spouse may have contributed to the management of the LLC, but any allocation must be based on facts. For plan purposes both LLC members' self-employment income will be shown on their K-1's.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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