Case Study Profile

Business Type:

Real Estate Broker (Independent Contractor/Self-employed Individual)

Business Entity:  

Sole Proprietor or LLC taxed as Sole Proprietor

Owner's Income: 

$68,000 net Schedule C earned income prior to deduction for plan contribution and spouse W-2 income

Owner's Age:

45; Spouse is age 45

Marital Status:  

Married

Employees:   

None

Plan Objective:  

Maximize tax deductible contribution to provide maximum retirement benefit

Comments:

Be less aggressive with other business deductions to increase earned income; pay spouse $18,000 as an employee for services to business; spouse contributes and deducts $16,500.  Learn more about adding a spouse to your plan

$21,036 more than the SIMPLE; $32,958

more than the SEP or Keogh in 2009!

The Mini(k) permits the independent contractor to save more on an after-tax basis than the SIMPLE,  SEP or so-called "Keogh" Plan.  Compared to the SIMPLE Plan, this saves an additional $5,259 in taxes (assumes 25% tax bracket); compared to the SEP, this saves an additional $8,239 in taxes (assumes 25% tax bracket).  But that's not all, look at the difference in benefit you gain by selecting the Mini(k) over a conventional plan.

The Mini(k) provides $2,709,921 at age 65; $1,212,313 more than the SIMPLE and $2,010,248 more than the SEP or Keogh!

However, be sure to consider the following factors before adding your spouse to your plan:

  • Justification and extent of compensation for services rendered

  • Business income available for payment of services rendered

  • The extent of the plan contribution based on payment for services rendered

  • The cost attributable to FICA taxes (Social Security and Medicare) by both the business and the spouse (and the relatively small cost for FUTA or SUTA taxes) - see analysis below

Learn more about the factors to consider before adding your spouse

FICA Tax Analysis

Owner's self-employment income:

$50,000  

Spouse W-2 Compensation:

18,000

  

FICA paid by employee (7.65%):

1,377

  

FICA paid by employer (5.74% in 25% bracket):

1,033

  

Total FICA tax: 

2,410

  

FICA Tax Savings by adding spouse:

N/A

  

Net additional FICA Tax Cost:                    

0

*

Plan contribution (100% of compensation):

18,000

  

Tax Savings:

$4,500

  

*The business owner would have paid the same FICA tax if received the $18,000 as income since income does not exceed the Social Security Wage Base ($106,800 as indexed in 2009).

What's the catch?  Just one, in reality the Mini(k)Plan is a Profit Sharing Plan with a 401(k) feature.  This means that the Mini(k) is a qualified retirement plan subject to numerous government compliance requirements.  If you don't comply with these requirements, you can lose the benefits gained by choosing this plan type over a SEP or a SIMPLE.  Here's a chart that illustrates just some of the compliance requirements and features for these different plan types.

Compliance Requirements and Plan Features

 SEP SIMPLE Mini(k)Plan

Formal Plan Document

 No

No

Yes

Trust Reconciliation

 No

No, for SIMPLE IRA

Yes, for SIMPLE 401(k)

Yes

Annual Filing

 No

No, for SIMPLE IRA

Yes, for SIMPLE 401(k)

Yes*

Rollovers from other Plans and IRAs 

 Yes

Another SIMPLE only

Yes

Loans Permitted

 No

No

Yes

Advantage to add Spouse

 No

Yes

Yes

Updates Required by Law

 No

No

Yes

Establish New Plan By

Due date of

return or any extension

October 1 unless

new employer

December 31

Must fund Employee Contribution by

Not

 Applicable

Corporation: Earliest date employer can transmit contributions.

Sole Prop/Partner: by due date or extension.

Corporation: Earliest date employer can transmit contributions.

Sole Prop/Partner: by due date or extension.

Must fund Employer Contribution by

Due date of

return or any extension

Corporation: by due date of return or extension.

Sole Prop/Partner: by due date or extension.

Corporation: by due date of return or extension.

Sole Prop/Partner: by due date or extension

*Recommended but not required until assets exceed $250,000

This chart illustrates basic requirements only.  All plans shown may be selected for audit by the government; all require timely and accurate completion of forms and other related documents when established and ongoing.  Chart is intended as a resource only; consult a professional before implementing any plan.

View comprehensive chart for these plan types: "Compliance Requirements and Limits"

View comprehensive chart for these plan types: "Available Benefits and Features"

Closing Comments

A SEP or SIMPLE plan is traditionally the appropriate plan type for an independent contractor (self-employed individual).  These plan types do not require formal plan documents or governmental reporting and disclosure and the additional cost for professional services typically associated with these requirements. The Mini(k) is a qualified retirement plan (Profit Sharing Plan with a 401(k) feature) requiring a formal plan document and governmental reporting and disclosure.  However, as a qualified retirement plan, the Mini(k) permits your spouse to contribute 100% of compensation up to $16,500 in 2010.

Bottom Line:  The associated cost to establish and maintain the Mini(k) is justified based on the additional taxes you save and the dramatic increase in benefits at retirement.

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The information provided is intended as a general resource, not as investment or retirement planning, or legal plan compliance advice or counsel.  If you consider any actions discussed in this update, we suggest that you consult a qualified planning, tax or ERISA professional.  ERISA Expertise LLC and Barry R. Milberg do not warrant and are not responsible for any errors and omissions from this update.  Any tax advice included in this written or electronic communication is not intended or written to be used, and it cannot be used, by the taxpayer for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.