How much total salary to allocate to defer $17,500 to 401(k)?

Question

From my small business, I would like to contribute to my wife's retirement (which also reduces taxable income to the company).

My question is about how much total salary should be allocated to her to contribute $17,500 to her retirement account, without her paying additional taxes from her pocket/purse? This is because the amount contributed to retirement is subject to Social Security (6.2%) and Medicare taxes (1.45%). In addition, my company also has to match her SSA and Medicare taxes.

If I reverse calculate from $17,500 sent to her retirement account by adding her SSA + Medicare, it would come to $18,949.65 with employer match of $1,449.65 making the total $20,399.30.

In addition, if I create a W-2 for this salary, should I show the total compensation of $18,949.65 with $17,500 deferred? Does the difference (18,949.65 - 17,500 = 1,449.65) become subject to Federal and State income taxes? If so, I would need to allocate more than $18,449.65 to her to cover Federal and State income taxes. I appreciate your answers and insights into this.

Thanks,
BReddy

Answer 1

You're on the right track, and yes, that small difference is subject to income taxes.

Do you use a payroll service? I do the same thing and use my payroll software to tweak the salary until the paycheck is just a few dollars every month (we run payroll once a month), with the rest going to the 401(k) and payroll taxes. So we're rounding up just a bit just so there's an actual paycheck with a positive number, and a bit does get withheld for fed/state income tax.

Also keep in mind you can make a company match. If your plan is a solo 401(k) with just you and your wife as the sole employees, consider the 25% match for both of you. The match is not subject to payroll taxes because it is a company expense. IRS web page: http://www.irs.gov/Retirement-Plans/One-Participant-401(k)-Plans