Wife's 100% Sch C LLC and husband works for it.

Technical topics regarding tax preparation.
#1
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Hi pros. I hope everyone is well. I have a client we have worked with for around 4 years. She owns a 100% SMLLC Sch C. Her husband was working for it. I dont know how much of a % he works for the company but he does not have any other job. I am going to ask. We have been preparing the return with her paying 100% of the SE tax and reporting 100% of the income on her Sch C. I reached out to the wife and she says her husband did need to pay into social security. We can fix this going forward. What about 2015 to 2018, which we had her pay 100% of the SE tax? Can we amend and just update this to show the appropriate amount of income to be allocated to the husband and have him pay into SE taxes for those years. And I would assume social security would update her contributions to be lower after the amendment? Thank you for any feedback.
 

#2
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What kind of $$ are we talking about?
 

#3
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What would you be amending to? A partnership?
 

#4
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Perhaps another alternative is putting husband on payroll to ensure some social security credits moving forward? Doubly so if you can move SEHI to a Sch C deduction...
 

#5
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This is a tough one. We are speaking about 120k income a year. Well, It is a SMLLC. My thought was show contractor expense for close to 1/2 of it on the Sch C and then report it on the Sch C of the husband. We have an option to show a husband wife joint venture, and it can split automatically from our software. I read a LLC joint venture husband wife has to file a 1065 versus the easy way of just reporting it on a SCh C and prepare a Schedule SE for each of them. Any suggestions would be great. Thank you.
 

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missingdonut wrote:Perhaps another alternative is putting husband on payroll to ensure some social security credits moving forward? Doubly so if you can move SEHI to a Sch C deduction...


Agreed. If the concern is to get SSA credits, this is the best way to accomplish this. Of course, this is something to do prospectively and not in prior years. If this was a concern to them, they should have brought it up earlier. A "Sole" proprietorship is, but one owner.
~Captcook
 

#7
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Considering your idea about If you go the contractor route,
- Upon what basis were you able to determine that the husband's compensation is "close to 1/2" of $120k?
- Upon what basis would the compensation be properly payable as a contractor rather than an employee?

What you're suggesting seems to be just making up numbers to split up SE tax and I'm not sure of the reason that you want to do this. There can be good reasons to do it, for sure, but I'm not sure why you're identifying this strategy for this couple. Why does client not feel that husband needs to pay into social security? There might be a really good reason for it (past high earnings of the husband, WEP considerations, etc) that you might not be aware of.

Also, and I must stress this, if the couple has health insurance, hiring the husband as an employee could potentially save SE tax that wouldn't be available as a contractor.
 

#8
JR1  
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And please tell us why they think he needs to pay into SSA? He loses money about 6:1 from calcs I've seen rather than if he invested that money on his own. Not to disregard a legitimate er/ee relationship....
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#9
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JR1 wrote:And please tell us why they think he needs to pay into SSA? He loses money about 6:1 from calcs I've seen rather than if he invested that money on his own. Not to disregard a legitimate er/ee relationship....


This isn't talked about enough in tax planning for couples like this. A couple earning $120,000 total may benefit if they both pay into SS. Benefits accrue more at lower income levels than higher ones (coincidentally, at a ratio of 6:1). The first $11,000 or so in average annual earnings earns a benefit at 90 cents on the dollar. The next ~$56,000, at 32 cents. Everything above that, only 15 cents.

If total income is $120,000 more than half would be in that 15 cent tier, and 2 x $60k earners accrue a higher total benefit - if this were over a lifetime, which it isn't. You'd need to look at both of their lifetime earnings histories and consider spousal benefits to see the actual impact.
 

#10
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Donut, thank you. The client is saying they work 50/50 and the LLC was under her. The tax returns were reported 100% under her for SE tax. She wants her husband to get credited 1/2 of the SE tax. We are thinking about amending 2016 and 2017 (2018 is extended) and showing this as contractor pay to husband for 1/2 of the income. Any thoughts here? Thank you.
 

#11
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Another question. How far can you amend to reallocate se taxes to someone or is it the same as income taxes and 3 years? Thank you.
 

#12
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Wow, interesting thread.

My first thought is:

Forget SS and other scheming - report it legitimately.

Put him on payroll and pay him an hourly rate for what he does as found on payscale.com, for example.

That's what it really is, right?

Climbing down from my high horse, isn't there some kind of rule where he would get an additional 50% of her benefits if they are together for 10 years anyway?
 

#13
Nilodop  
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#14
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ItDepends wrote:Forget SS and other scheming - report it legitimately.

Climbing down from my high horse, isn't there some kind of rule where he would get an additional 50% of her benefits if they are together for 10 years anyway?


Yes, of course - but if put in the unfortunate position of providing therapy about their tax bill it's an easy discussion if they're going to end up with better benefits anyway. And to the extent there's a reasonable range to what the second earner gets, looking at SS could be part of the assessment.

Yes, the spousal benefit is 50% of the primary insurance amount for someone married at least a year and collecting now, or an ex-spouse if they were married at least 10 years. That 150% of S1's benefit (single-earner couple) may be less, though, than the S1+S2 benefit (both working and earning same total amount).
 

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tb_in_sf wrote:
Yes, of course - but if put in the unfortunate position of providing therapy about their tax bill it's an easy discussion if they're going to end up with better benefits anyway. And to the extent there's a reasonable range to what the second earner gets, looking at SS could be part of the assessment.


I totally get it. Therapy, lol.
 

#16
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JR1 wrote:And please tell us why they think he needs to pay into SSA? He loses money about 6:1 from calcs I've seen rather than if he invested that money on his own. Not to disregard a legitimate er/ee relationship....


I'm sure that one can craft a fact pattern such that a specific person who lives in America could have a financial situation whereby they could earn six times as much investing in stocks than if they paid the same amount of money into the social security program which provides an inflation-adjusted retirement annuity, long-term disability insurance, and survivors' annuities.

That does not mean that it is true for everyone, or even a majority of people. And even for the limited number of people who it would apply to, such a comparison is so obviously apples and oranges on a risk-adjusted basis that it shouldn't be made in the first place.

wwwcpa1biz wrote:Donut, thank you. The client is saying they work 50/50 and the LLC was under her. The tax returns were reported 100% under her for SE tax. She wants her husband to get credited 1/2 of the SE tax. We are thinking about amending 2016 and 2017 (2018 is extended) and showing this as contractor pay to husband for 1/2 of the income. Any thoughts here? Thank you.


1 - Do not amend 2016 or 2017 because it does not represent the fact pattern that existed in those years. Just erase it from your mind because you have to sign the amended tax returns and you have knowledge that you are misstating the facts on the amended tax return. That, or charge the client enough to pay for those preparer penalties

2 - I'm doubtful that you should go through with this plan for 2018 unless husband was actually an independent contractor rather than an employee. I'm sure the wife issued a 1099 in January to the husband for his contractor pay? No?

3 - How does this couple have health insurance?
 

#17
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Donut, thank you. This is the husband and wife's only earned income. They have self-employed health insurance under her. We can move on from 2016 and 2017. We dont need to change the past. I am okay to update 2018, and come up with a plan going forward. Thank you for the insight.
 


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