Yes, you can have a Solo 401k with your spouse. There are so many different ways to describe a spouse. We often hear a spouse described as a partner, friend, lover, companion. But a spouse can be so much more: an adventure buddy, motivator, protector, provider, business partner, co-pilot…. The list goes on. A spouse is half of your marriage and life.
Therefore, it makes sense to want to include your spouse in your retirement plan. With a Solo 401k, both spouses can participate in the same plan. To qualify, you both must work in the business adopting the plan. Together you and your spouse can make the most of your retirement by both being able to contribute.
What’s Your Business Structure?
First, determine your type of business structure. Then, determine how your spouse can participate in the business. When your spouse participates in your business, they can also participate in your Solo 401k plan.
A knowledgable CPA is a vital part of the process. A good CPA can help you determine what structure you’ll need to ensure your spouse is compliantly working for your business. They can also help if you plan to compensate your spouse from business earnings.
Let’s cover the different types of business structures and how your spouse can participate:
Sole Proprietorship Solo 401k and Your Spouse
There are 3 ways you can structure your sole proprietorship if your spouse works with you:
- One spouse is the sole business owner of the Solo 401k; the other spouse will receive a W-2 as an employee in the first spouse’s business. This is often the simplest solution. This may be best if the second spouse has only minimal duties and activities in the business.
- The couple acts and files as a partnership, where each partner will receive a K-1(Form 1065). The partnership will not pay income taxes itself, passing the profits and losses on to each partner. If both spouses contribute materially to the business, a partnership will be the default structure in the eyes of the IRS.
- The couple files as a Qualified Joint Venture. This solution is possible when both spouses work and contribute materially to the business and file a joint tax return. This allows you couple to avoid forming a partnership. Also, both spouses will receive credit for social security and Medicare coverage purposes. Each spouse will separately report income gains and losses, as well as business deductions and credits on Form 1040 Schedule C.
Limited Liability Company or Partnership
There are 3 ways an LLC may be treated, depending on your structure:
- Partnership – If an LLC has 2 members (in this example, each spouse), it is classified as a partnership for federal tax purposes. Each spouse in the Solo 401k is responsible for their income, profit and loss, as shown on a K-1 (Form 1065)
- Corporation – If an LLC is classified as a Corporation, it will file Form 8832. The Corporation files tax form 1120. There are no flow through items to a 1040. Each spouse/member receives a K-1 to document income, profits, loss, etc.
- Disregarded entity – If an LLC only has one member, it is a disregarded entity. You’ll report business activity on your tax form1040, typically on Schedule C. For a participating spouse, the member of the LLC would pay the spouse a W-2 so the spouse is eligible to participate in the Solo 401k.
Corporation
- C-Corp – C-Corps are corporation that file its own tax return (usually forms 1120 and 941) and pays taxes on earned income. The corp then pays dividends to its shareholders (each spouse). Those shareholders pay taxes on their earnings, effectively being taxed twice.
- S-Corp – S-Corps are corporations that pass corporate income, losses, deductions, and credits down to the shareholders. This formation is sometimes preferable to the C Corp, as the C Corp is taxed twice, (through the corporation and again through the shareholders). An S Corp is only taxed once (through the shareholders).
Including Your Spouse in the Solo 401k
Even though full-time W2 employees disqualify a business owner from a Solo 401k, the spouse is an exception! The IRS allows your spouse to be a full-time W2 employee in your business and you can still have the Solo 401k plan.
Therefore, your spouse can be a co-owner or simply an employee in your business. As long as your spouse is actively involved in the business as an employee (full-time or part-time is OK) or is an owner of the business, they can also be in your Solo 401k.
The IRS website has a couple of good resources as well as an overview on Choosing a business structure based on your preferences. As with any business decision, always check with your CPA to ensure everything remains compliant and structured in the best way for you and your spouse to both participate.
Have questions on including your spouse in the Solo 401k? Reach out to the Solo 401k Experts at Nabers Group and we’ll be here to help.
34 Responses
Can your spouse contribute only what they make in the business? Or can they contribute the maximum limit (lets say the business makes 500k a year) that the main spouse contributes automatically like a a spousal IRA allows) (so in this case 57k for both spouses)
Hi Peter, yes your spouse can only contribute based on their earnings. Make sure you’re using our contribution calculator to plug in your numbers here: https://www.solo401k.com/calculator
I think this calculator is wrong. SEP and business contributions for solo 401ks can be up to 25% of income not including the contribution. That end condition is important. It creates a circular definition which effectively limits the max contribution to 20% of gross income. At least that is my understanding. I’d love to find out otherwise.
I’m confused and feel like I keep reading conflicting information. How much can the business contribute to my spouse’s individual 401(k) plan? Her earnings are a bit over $21k (she defers all $19,500 prior to taxes).
Hi RM, contributions are based on compensation. Remember, there are two types of contributions: 1) Employee salary deferral and 2) Employer profit sharing contributions. We’d recommend you check out our Contribution Calculator at https://www.solo401k.com/calculator to determine the contribution amount for your spouse.
My spouse is currently paid out as 1099-NEC. Would that qualify her to contribute to my solo 401K, or does she need to be paid as a W2 employee?
Hi Michael, yes that should be fine but just make sure you are double checking with your tax professional!
My business is a single-member LLC structure. I am the only member. I pay my wife W2 salary from my business. Can my wife have a solo 401K account and contribute to it?
Hi Marc, great question! Your single-member LLC can certainly have a 401k plan and your wife can participate in the company 401k as an employee! Learn more at our New Account Training here. When you’re ready to get started, click here to begin your application online.
My wife and I are over 55 and have a consulting company. We would like to contribute the maximum amount to our solo 401k plans. We understand that we can contribute $26k each, but are unsure about how to claim the profit portion. Since we are not incorporated, it sounds like we can only contribute 20% of the Schedule C net. Is this 20% each or combined?
Hi James, great question! Make sure you’re using our Solo 401k Contribution Calculator . You can each contribute 20% based on your net earnings. Make sure you click ‘View Report” on the 401k calculator so you can see a breakdown of how much you can contribute for each contribution type.
That’s awesome, James! Those little tweaks can make a big difference…especially from a tax perspective!
Thanks for your help, greatly appreciated !
I am the only owner and the only practitioner for my LLC. My wife providers a part-time computer help at my LLC.
I have my own Solo 401K already. I will receive your New Account Training. Then, set up a Solo 401K account for my wife.
Great news! I found using your calculator that we need to change to a single owner corporation. With an average income of $140k a year, we are able to contribute $61k each instead of $52k as an unincorporated business.
Thank you!
What happens to the solo 401k in this circumstance?
1. Wife owns single-member LLC, soloK is set up under her company
2. Husband is employed part-time for wife’s LLC
3. Husband has separate employment but…
4. Husband then makes partner at a separate firm
4a. With full-time employees
4b. With no full-time employees
Does husband’s ownership percentage of the separate firm matter?
Thanks!
Great question, Anthony. YES – the husband’s ownership percentage in the separate firm matters! If the husband owns 80% or more in the firm with full-time W2 employees and materially participates in the wife’s business (Single-member LLC), then even the single-member LLC cannot have the Solo 401k as the IRS considers both businesses part of a “controlled group”.
Check out our article about this exact scenario.
Thanks for the response! Now if the husband no longer materially participated in the wife’s business with the solo401k, would
A) wife still be able to participate in the solo401k
B) husband be able to participate (rollovers)
C) husband be able to make direct contributions?
You all have a stellar product and are fantastically knowledgeable. I have made many recommendations of your service! Thanks for all you do on behalf of your customers.
I just wanted to say wow… honestly wow… I’ve been asking around and when I searched this came up and was so easy to follow
Thank you so much for putting this together and your calculator and all the fine answers to people :-).
I am a single member LLC and i plan on including my wife, by making her an employee, but I would think making her an owner would require me to change to a partnership. Believe it or not, I’ve asked multiple lawyers(paid) and I get different answers..
Wait.. you probably aren’t shocked lol
Hey Michael, thanks for your kind words and we’re glad the post is helping! We do have some clients who run a sole proprietorship/single-member LLC and issue a W2 to their spouses as compensation (without making them an owner). Spouses are excepted in the 401k plan (where your business can’t have any full-time employees, other than a spouse). So, this situation may work for you without making her an owner. Of course, we’ll defer to the experts but have seen this work in the past for some clients!
If I have a Single Member LLC and the husband works for her on a W-2, can she make the employer contribution for him even if he does not do the employee deferral? It would be 25% of his total wages correct? They would have to increase his wages in order to do the employee deferral but he’s on social security and would have to pay it back if he goes over the earning limit.
Great question Cara! Yes, the employer (wife) can make profit-sharing contributions based on the husband’s W2 wages from the sponsoring business (single-member LLC). Typically single-member LLC profit sharing contributions are 20% of net compensation. However, keep in mind all contributions are based on compensation (even profit-sharing contributions) so there will need to be demonstration of wages in order to make those contributions.
I have a single-member LLC with a Solo 401k and would like to be able to use the rule of 55 to retire early. The problem is if I quit the business the 401k can no longer exist. Would it be possible to transfer the business to my spouse and take advantage of the rule of 55?
Great question Marc! Double check with your CPA, but if your wife is the owner of the business (which is still legitimately running with an intent to make a profit) and you are a participant int eh company 401k plan, then this strategy may work for you just fine!
I tried to use calculator but could not find reply to my question about Solo401k. If I have a Single Member LLC and wife works for it, I understand total contribution cannot exceed wages. So would this calculation be correct if I also want to contribute 25% towards profit sharing.
Salary $26,000, wife elective deferral $19,500 and then I as employer contribute for employee $6,500 (25% of salary) towards profit sharing. As employer I will do same 25% for self.
As total of elective deferral and profit sharing is same as salary, it should be okay, correct?
Always double check with your CPA, but those calculations look correct to us, Raj!
Hi Raj, I like this approach. Have to enter above information without W2. I think you need to generate W2 for elective deferral
Hi, thanks for all the great info! My spouse is on a W2 but we’ve never made contributions for her into my existing Solo 401k. If we start making contributions for her, too, do our contributions effectively lump together within the same fund, or are there partitions (ie, different account numbers?) between her money and mine within the plan? Thanks!
This is the same question that I have. Do I have to make any material changes to my existing Solo-K account to begin making contributions for my wife?
Please email our support team so we can ensure your wife is listed as a co-participant and/or co-trustee in your Solo 401k plan. This will allow her to make contributions from business earnings and rollover funds from external retirement plans.
Great post that gave a lot of information. I am still confused about a few things
1. Do both contribute to the same 401k account or can we have separate accounts?
2. How do I calculate how much is legally allowed? Can I contribute 100% of my paycheck to the IRS max limit of 20,500?
I and my spouse are equal partners(50% each) in a business. I have a w2 income where I max out the 401K contribution limit so I was wondering, can my spouse have a solo 401K? If yes, what are the contribution limits? Let’s assume there is a $100,000 net income.
Hi-
Great website! You seem really knowledgeable.
My business income after expenses is about $200,000. I would really like to reduce self-employment tax. My plan is to set up an S corp with a solo 401K.
I would like my wife to be a part of the solo 401K but paying her W2 wages just increases the total FICA.
If I understand right, my wife can participate in my solo 401K as an owner rather than as a W2 employee. Is that correct?
Thanks for your help!
Jim
We do not live in a community property state causing our solo 401k, with my wife and I as owners, to be viewed as a partnership, at both the federal and state levels. We want to simplify to one member-owner and remove my wife from the 401K. How do we accomplish this? Who and when should we be sure to file an amendment to our plan with to make this change?
Question: I have a full time federal employment and it contributes 27k of Elective deferral in box 12a. I am also a sole proprietor as a physician and made $200k. My wife is the VP of Operations for the sole proprietor business and I would like to contribute maximally to both of our solo 401k. If she is not a W2 employee of the business, can I just use 50% of the net earnings as a basis of the solo 401k contributions? I was told that a spouse is “automatically” recognized as a owner in the eyes of the IRS. So my contributions would max out at $61k and would hers also max out at $61k?